Tutorial: Using Advanced Features
Writing Custom Entry/Exit Systems
Using Correlation Analysis
Using Correlation Analysis
i Tutorial Task
Run correlation analysis and create a prediction based on the highest correlated inputs.
The Correlation Analysis Wizard helps you identify which inputs may provide leading information about values you are trying to predict. It does this by analyzing the relative correlation between selected prices and indicators with the desired output.
The main limitation of this is that Correlation Analysis identifies potential inputs based only on correlation. Other values may contain valuable information that is not linear in nature or is only relevant at certain times. Because of this, correlation analysis should not be viewed as the only source for potential inputs.
Let’s see an example of how Correlation Analysis can be used to create a price prediction.
Step-by-step Instructions
Part 1. Run Correlation Analysis Wizard
Let’s begin by seeing if any of the index data in the sample portfolio could provide information about how Amgen will trade.
1. Right-click on Amgen in the Portfolio View and select Analyze Correlations….
Figure 1. Selecting "Analyze Correlations…"
2. On the Select a Field to Analyze Dialog, the Close field will be selected by default. Press OK to accept this.
3. The Correlation Analysis Wizard will default to Determine if other fields may be good inputs for predicting this field. Press Next to continue.
4. Let’s see if there is any correlation between this value and the closing prices of our sample indices. Select Sample End-of-Day Indices.
Figure 2. Selecting "Sample End-of-Day Indices"
5. Press Add Selected Fields…. TradingSolutions will ask if we only want to select a single field name from the selected data series. Let’s limit our search to just the Close field. Press Yes.
Figure 3. The "Select Single Field Name?" message.
6. On the Select a Field Name to Add Dialog, the Close field will be selected by default. Press OK to accept this.
7. The percent change in the closing prices of the sample indices should now be listed in the currently selected fields.
Figure 4. The selected fields after indices have been added.
8. Press Next to advance to the Analysis Options page.
9. By default, TradingSolutions will analyze the correlations for the values it would use in training a prediction. To perform the analysis, press Finish.
Figure 5. The "Analysis Options" page.
10. After some brief processing, TradingSolutions will display a sorted list of the highest correlations.
Figure 6. Correlation Analysis results.
11. The row indicating 99% confidence indicates the correlation that would be necessary to be 99% statistically confident that the values are inter-related as opposed matching by random chance.
Figure 7. The 99% confidence row.
Step-by-step Instructions
Part 2. Create a Prediction
Using the correlation analysis report, we can create a prediction based on the highest correlated values.
12. Select the top four correlated input fields by click on the top entry, holding down the Shift key, and clicking on the fourth entry (which is on the fifth row).
Ä Note: Negative correlations are just as informative as positive correlations. It simply indicates that the values are moving in opposite directions rather than the same direction.
Figure 8. Selecting the input fields to use in the prediction.
13. Press the button labeled Create a New Prediction from the Selected Fields….
Figure 9. Location of "Create a New Prediction…" button.
14. Review the introduction to the Predict a Value Wizard and press the Next button to advance to the Select Desired Outputs page.
15. The wizard will automatically be pre-configured to use the values from the Correlation Analysis Wizard. For example, on the Select Desired Outputs page, the Close field is automatically selected. Press Next.
16. On the Select Inputs page, the selected index values are automatically selected. Other inputs could also be added at this time. For example, let’s add the closing price of this stock by clicking on Add Selected Input.
Figure 10. Prediction inputs after Amgen Close is added.
17. Let’s keep the remainder of the settings. Press Next, then Next again, then Finish to create the prediction.
18. TradingSolutions will being optimizing the prediction. Exit out of the Correlation Results by pressing OK.
19. When TradingSolutions is done processing, you can use it the same as any other price prediction. This includes using it in an entry/exit system to determine when to buy and sell.
Congratulations!
You have learned the basics of creating a correlation analysis and using the highly correlated inputs as inputs to a prediction.
This approach can also be used to find inputs for predictions of the optimal signal. However, since the value of the optimal signal is abstracted from the change in the price, it may be more difficult to find highly correlated inputs.