When the fundamental assumptions associated with the current movements in price, volatility or returns change, it may be time to reevaluate your trading strategies. Trading Sciences has developed a unique and proprietary Expectation Modeling (EM) technology for prices, volatilities and trading system performance. It looks at any financial time series and determines whether the dynamic determining a pattern of equity returns, prices or volatilities remains intact. Specifically, EM estimates whether the energy in a trend or sideways pattern is increasing or decreasing relative to a statistical confidence limit.

When the lower confidence limit of EM is violated, we furnish a red flag that suggests there is only a small chance the market dynamics in place at the time a trading system went online is still valid. EM is ideal for density estimations, quantitative modeling and proprietary trading systems, and it is essential to our own trading systems.

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EM Provides an Edge Over Bollinger Bands

EM’s methodology models returns, prices, or volatilities in a manner somewhat similar to what one might see with Bollinger Bands – but without their critical flaws or weaknesses. The central channel of Bollinger Bands contains a serious lag and the bands are based on deviations around such a lagged center. The estimation of these deviations contains additional lag as some window of time is needed to compute the estimate of scatter.

EM produces a central channel that contains little to no lag in the analysis. The central channel is a forward-looking lag-free estimate of how well the underlying dynamics generating the current density can be regarded as constant. The prediction limits from the mathematical model contain a true probability for the model as it is applied to the current day’s data.