Wednesday, February 17, 2010

Probability mapping (2)

While building a model based on the probability mapping from the previous post I wasn't quite satisfied with the initial results. So I took a step back to a one dimensional state space and plotted the 5 day forecast of the XLE/XOM vs bollinger %b. Zero on the x-axis corresponds with -3 sigma and 100 with +3 sigma deviation . Y-axis shows the ratio between XLE/XOM  5 days into the future and today .

The figure shows just how difficult it is to forecast the movement of the ratio. Ideally, the data should follow a band from upper left to lower right corner. Instead, it is quite hard to see any trend present. After a linear fit (red line) some trend can be found still. Note that around 50 pct_b it is exactly coin flip between increase and  decrease in XLE/XOM.

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