Classifying Market States with WARS

  • Authors:

  • Lixiang Shen;Francis E. H. Tay

  • Affiliations:

  • -;-

  • Venue:
  • IDEAL '00 Proceedings of the Second International Conference on Intelligent Data Engineering and Automated Learning, Data Mining, Financial Engineering, and Intelligent Agents
  • Year:
  • 2000

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Abstract

In this paper, a new indicator - WARS (Weighted Accumulated Reconstruction Series) at classifying the state of financial market, either trending state or mean-reverting state, was presented. Originated from the computation of Entropy, this new indicator was found to be able to reflect the market behavior accurately and easily. The algorithm of generating WARS and its meaning related to Entropy were introduced and some comparison results between WARS and the Daily Profit Curve were listed. As a new indicator, WARS also can be used to build a trading system - to provide buy, sell and hold signals. Through the application on S&P 500 index, it was verified to be effective and was a promising indicator.