Which indicators to use as predictors?
“Technical analysis” predicts future prices based on past prices and volumes.
Most traditional technical analysis is mumbo-jumbo.
But research shows that many prices do not follow a pure random walk. Often, "trending" and "mean reversion" can be observed.
- Trending is a positive correlation between successive price changes.
- Mean reversion is a negative correlation.
- Both phenomena can happen for the same asset on different time scales.
To capture daily trending or mean reversion, we use the previous change in the price of a fund as a predictor for the current day's change.