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2010

Glossary of Indicators

DV Indicators

DV Indicators

[Glossary of Indicators]

DV Bounded (DVB): The DV Bounded is also known otherwise as the “DV2” and was created by David Varadi to capture the normalized relative close. The “DV2” version of the DV Bounded represents the 2-period average of the relative close to the high-to-low range. The “bounded” portion represents the normalization using a percentile rank function to re-scale the indicator on the basis of the historical distribution of values. DV Unbounded (DVU): This is the unbounded variant of the DV2 that was originally introduced by Michael Stokes at MarketSci. Unlike the original DV2 -which is bounded by using a percentile rank function- the unbounded DV2 is simply a raw conversion of the average of the relative close to the high-to-low range. DV Oscillator (DVO): This is the “mother oscillator” framework from which the simpler DV Bounded variant was originally derived. It was conceived in its first form as a flexible blueprint for the selection of the optimal oscillator calculation. The DVO is partially adaptive and more accurate/reliable than the original version. As a consequence it requires more historical data, and the indicator values make smoother transitions to changing volatility. As of the current writing, no other public indicator that we are aware of shows raw performance as strong as the DVO on the major indices. DV Super-Charged Bounded (DVSC): This is the smoothed and slightly altered version of the DV Bounded that delivers superior performance. The nature of the calculation is very similar, but the differences make it more responsive with less whipsaws than the original. DV Intermediate Oscillator (DVI): This is the smoothed intermediate oscillator framework designed to complement the DVO. It was also designed to be flexible for use in adaptive systems. The current DVI is a combination of two different indicators: 1) DVIM- DVI Magnitude which measures the distance price has travelled over multiple intermediate time frames and 2) DVI Stretch which measures the net up or down days over multiple time frames. Both indicators are complementary and combine to produce a superior composite- the DVI- in most cases. The DVI line is very smooth and is designed to help identify areas of higher or lower value rather than peaks or valleys as it stays in oversold or overbought territory for longer periods. This makes it ideal for combination with intermediate trend systems, or for filtering DV2, DVSC or DVO trades. DV Mean-Median Divergence (DVMM): This is the DV equivalent of the MACD, substituting the median for the average to make it more responsive to picking up acceleration in the trend. It is one of the few indicators that are successful on noisy intraday data. It is one of the best intermediate term trend indicators we have tested, and can be used numerous ways: 1) as a trend filter 2) as a trend indicator 3) an oscillator 4) it can be re-scaled to create a volatility measure. Rolling Exponential Moving Average (REMA): This is an exponential moving average that creates a “rolling memory” as new price data is added to make it slightly less weighted than a standard EMA. It can be used to smooth indicators or as a replacement for a moving average in a trend strategy. Our preferred use is to apply the REMA to a momentum or ROC series to enhance responsiveness for relative strength applications. The DVST uses the REMA in this format and can be applied also as a trend indicator. Rolling Relative Strength Index (RRSI): The RRSI uses the REMA in the place of the conventional average in the RSI calculation. This makes it a more responsive price oscillator and superior to the RSI in many respects. All other features are identical to the RSI. Users can select their preferred time period, such as a 2-period. DV Fractal RSI (DVFR): The Fractal RSI is a “Level 1” adaptive indicator that dynamically shifts weight in the RRSI between 2 and 30 days by default. This shifting is done to accommodate changes in volatility and fracticality in the market price data. However users may select any two periods in between these bounds. The longer term bound (30 days DV Indicators | Copyright CSS Analytics Inc 2010 All Rights Reserved 2

DV Indicators

[Glossary of Indicators]

by default) is always set to have a trend influence on the shorter-term bound. Some good parameter choices you may wish to explore include 2/30, 2/15, 3/30,3/20, 10/30, 14/30. DV Adaptive RSI (DVAR): The Adaptive RSI is a “Level 2” adaptive indicator uses the same bounds as the Fractal RSI, but determines weight based on relative profitability within the bound spectrum instead of optimization. The Adaptive RSI performs well across a broad array of instruments and does a very good job of adapting considering its limited input. It requires a lot of data to calculate and as such is only available in the Excel Plug-In. DV Aggregate-M (DVAM): The DV Aggregate M is a composite trend/mean-reversion indicator that is based on integrating the short-term and long-term price distributions. The AggM assumes that prices are noisier and tend to mean-revert in the short to intermediate term, but tend to trend over longer time periods. It has been shown to be effective across a wide array of markets and stocks and is one of the more general/robust DV Indicators. DV Adaptive Agg-M (DVAA): The Adaptive Aggregate M is a “Level 2” adaptive indicator like the Adaptive RSI that determines weight based on relative profitability within the bound spectrum but constrains the long-term setting to avoid changing the nature of the original indicator. It can be combined with the original Aggregate M to give more accurate signals. DV Intermediate Stretch (DVIS): This is one component of the DVI that isolates the stretch in terms of net days up or down over a series of periods and is re-scaled to create an accurate and consistent measure. The stretch is not like RSI because it does not consider the magnitude of up or down days but rather the net difference. It also looks at the short, intermediate and long time frames with a net weighting on the intermediate. This is a very accurate and useful indicator for identify mean-reversion areas of value rather than actual turning points. It can also be used as a trend measurement in conjunction with the ADX (Average Directional Movement). DV Intermediate Magnitude (DVIM): This is the other component of the DVI that looks at the magnitude of up and down movements and is smoothed to reduce noise and also re-scaled to create an oscillator that appears to move in a “wave” format. The DVIM is a great complement to the DVIS because it measures the net percentage move over a variety of lookbacks weighted primarily on the intermediate time-frame. Like the DVIM, it does not attempt to identify turning points, and is instead a measure of relative value that does not change as frequently as other oscillators. The “wave” movement of the indicator is ideal for “hook” type mean-reversion strategies that buy or sell following a transition from overbought or oversold levels. It can also be lengthened to create an excellent trend or relative strength indicator. Trend Stochastic (DVTS): The Trend Stochastic is a super-smoothed 10-period stochastic that moves gradually relative to the standard indicator developed by George Lane. It borrows from concepts used to smooth noisy data such as momentum. As a consequence it can be used as a trend indicator or a filter for mean-reversion trades. It is a number scaled between 0 and 1, where .5 is not necessarily the median point. It can be traded long anywhere above .4 to .6, and short below. Or it can be traded by observing whether the stochastic is rising or falling, and potentially a combination of both the direction of movement and relative position. DV Trend-Minus Cycle (DVTO): The Trend-Minus Cycle oscillator is a transform that nets the difference between the trend stochastic and a calculation related to the DVDS or super-smoothed double stochastic. The DVTO is useful for markets where an intermediate trend signal is hidden or obscured by a cyclic component. This trend may occur at medium frequencies such as the S&P500 or at extremes such as the case with Oil. If the DVTO is highly unprofitable on a given market that is usually because it is mean-reverting at the intermediate level—this occurs in markets such as natural gas or gold stocks. The benefit of the DVTO is that you can use it to filter intermediate trend signals such as in DV Indicators | Copyright CSS Analytics Inc 2010 All Rights Reserved 3

DV Indicators

[Glossary of Indicators]

the MACD or DVMM, or you can use it to combine with longer term trend indicators to create a more accurate multiple time frame system. DV Super-Smoothed Double Stochastic (DVDS): The super-smoothed double stochastic is the preferred meanreversion variant to the conventional stochastic by George Lane. The DVDS normalizes the 10-period stochastic position within the channel to increase peak/valley classification accuracy and is smoothed twice to make it less prone to whipsaws. It does not use a percentile rank classification which tends to increase median accuracy versus extreme accuracy. As a consequence is a good compliment to shorter –term oscillators like the DV2, DV Stochastic, or RSI2, or even intermediate oscillators like the DVI as it helps to increase the odds of finding a temporary bottom or top. DVDS levels below 10 and above 90 often coincide with peaks/valleys within a few days. With the broader trend, levels below 20 and above 80 tend to be the appropriate signal levels. DV Stochastic (DVS): This is the short-term cousin of the DVDS and resembles a stochastic version of the dv2. Like a conventional stochastic it permits highly profitable entries from oversold/overbought levels when the indicator is rising/falling, and this is a much lower risk entry than classic rsi2 and dv2 variants. It isn’t designed as much for binary use, although the binary version responds better to adaptation than DV2 or RSI2 variants because it is more predictable in its oscillation. It does use the percentile rank to permit a consistent number of entries. DV Bands (DVBU/DVBL/DVBM): The DV Lower Band (DVBL) price is similar to the lower band of a standard Bollinger
band but is re-scaled to the annual lower band level frequency. The DV Middle Band (DVBM) price is similar to the middle band of a standard Bollinger band--but is not the average price but rather the re-scaled average price. The DV Upper Band (DVBU) price is similar to the upper band of a standard Bollinger band but is re-scaled to the annual upper band level frequency.

DV Band Indicator and DV Band Percentile (DVBI/DVBP): This is the DV Band Indicator for DV Bands. For the Excel PlugIn this is the percentile rank of the H,L,C version of the z-score. The DVBP returns the price associated with a userdefined percentile and H,L,C range. Thus if you wanted to know what the price of the S&P500 would be at the 95th percentile based on the last 30 days of prices you would highlight the H,L,C range over the past “n” days and type in “95%.” In the case, with price data in a spreadsheet in descending order, you would type in as follows: =DVBP(C3:E32,95%)=$119.13 Both the DVBP and DVBI can be used as probability-based indicators, where the likelihood of exceeding the absolute extremes the next day is very low. In our testing the upper and lower DV Bands contained up to 95% of closes out of sample—that is, the chances of exceeding the upper or lower band or 97.5th and 2.5th percentiles were roughly equivalent to their promised probability (2.5+100-97.5=5% of values outside the range). This makes DV Bands a good tool for mean-reversion strategies and/or filtering for abnormal market conditions. DV Zones (for Excel Plug-in only): This is one method of identifying regimes, in this case DV Zones are constructed using DVRAC- a trend filter that uses multiple smoothed regression slopes that are smoothed with a 30-day measurement periods, and DVPV which is the percentile rank of 30-day historical volatility. The following table shows the corresponding number codes and indicator values used to de-lineate the zones:

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DV Indicators

[Glossary of Indicators]

DV Zones are excellent for developing comprehensive trading systems. They are static regimes that capture a broad spectrum of market conditions. You also may wish to shift a portfolio allocation to various systems dynamically based on the current zone position. The most common use of zones is to understand the performance of a given indicator within each zone, since they will be very different. It is instructive in some cases to consider longs separately from shorts. For example, in up trends with low volatility, shorting using a short-term indicator like the RSI2 or DV2 might not be desirable. The same may apply with going long in down trends with low volatility. As always taking a smaller position size is the least risky alternative if you have a good system to avoid missing out. The zone concept can be applied using other indicators as well such as the 200 day moving average. DV Super-Charged Percent Exposure (DVSE): This is the DV Super-Charged DV2 percent exposure model that varies between 150% and -150% based on a simple algorithm. The DVSE increases exposure on both the long and short side at extremes, and normalizes its exposure positioning to keep size proportionate. DV Bounded Percent Exposure (DVBE): This is the DV2 percent exposure model that varies between 150% and -150% based on a simple algorithm. The DVSE increases exposure on both the long and short side at extremes, and normalizes its exposure positioning to keep size proportionate. DV Historical Volatility (DVHV): This is the standard historical volatility calculation with a used defined measurement period. The default setting is 30 days. The calculation is the standard deviation of the natural logarithm of price changes over the period selected scaled to 1year as defined by 252 trading days using the square root rule. It has been multiplied by 100 to make it comparable to the VIX. When the VIX is trading above this number it is bullish for the market and vice versa based on our historical research. DV Percentile Rank Volatility (DVPV): This is the percentile rank of DVHV with a 30 day default setting and a 252 day lookback for the normalization. The DVPV is an excellent tool for system filtering and testing as well as position sizing and portfolio allocation. Primarily it should be considered as a key measure to watch when deciding between meanreversion and trend-strategies. It is also a key component of “zones” analysis (see DVZN). DV Composite Volatility (DVCV): This is a composite volatility measure that includes ratio volatility , longer term historical volatility, and a measure of daily variation. It can be used as mean-reversion filter on its own or combined with DVPV. A rising DVCV over the past week or 5 days and a reading above the lowest quartile or .25 is more favorable for short-term mean-reversion on an absolute and risk-adjusted basis. Day-traders may also want to pay attention to the DVCV. DV Breakout, Composite Volatility Plus, Composite Volatility Minus (DVBR/DVCP/DVCM): All of these indicators are related- the DVCP and DVCM are the components of the DVBR which is a breakout indicator. Both the DVCP and DVCM measure short-term range expansions, with the DVCP (composite plus) making a positive range expansion from lower volatility and the DVCM (composite minus) making a downside or negative range expansion from lower volatility. The DVBR is a breakout indicator that is by default the 8-day exponential moving average of the difference between DVCP and DVCM. The DVBR was highly profitable in the pre-mean reversion days on the S&P500 and recently made a reDV Indicators | Copyright CSS Analytics Inc 2010 All Rights Reserved 5

DV Indicators

[Glossary of Indicators]

surgence during the rally. It is the anti-thesis to DV2 and many others, and tends to perform well on trendy stocks that have high LTR ratings such as in the Livermore index. It can also be used to screen/filter DV2 trades or any other meanreversion trades or screen for trend entries along with DVRAC. DV R-Squared Autocorrelation (DVRAC): This is the premier trend filter used within the 6 different regime “Zones” that reflected different combinations of trend and volatility. The DVRAC utilizes a slope-based R-squared correlation of prices that captures the Highs, Lows and Closes. Smoothing is applied to the indicator which minimizes false signals but also has the disadvantage of producing lag.DVRAC levels above .2 show a statistically significant positive trend which helps to provide a minimum criteria for placing buys to avoid false entries. Levels between -.2 and .2 are indicative of temporary uncertainty in the trend condition, and this area is often called the “No-Trend” zone. Levels of the DVRAC below -.2 show a statistically significant intermediate down trend. This must be analyzed within the context of the long-term trend to consider going short. DV Differential Autocorrelation (DVDA): The differential autocorrelation indicator is a filter that detects shifts in the difference in autocorrelation between closing prices and high versus low prices. This is significant as a trend/meanreversion filter since a strong trend will tend to have persistently higher closes but variation in highs and lows. Levels of DVDA well below .25 characterize short-term random drift in the market and indicator signals are less valuable in this area. In general, a falling DVDA over 1-5 days is a mean-reversion environmental signal. A rising DVDA signals favorable conditions for the prevailing trend. DV Composite Fractal Efficiency (DVFE): This is a composite mean-reversion and trend indicator that measures fractal efficiency at two different time frames. The DVFE assumes that mean-reversion resides in the short-term and trends exist in the long term similar to the Aggregate M indicator. The signals are not highly correlated to the Agg M even though the default periods are nearly the same. This is because the DVFE is best traded at extremes of >.75 for longs and <.25 for shorts. The binary DVFE is not nearly as impressive as the Agg M, which naturally introduces the possibility of taking extreme DVFE signals and using binary Agg M to take lower level signals. DV Smoothed Trend (DVST): The DV Smoothed Trend is a momentum measure that is smoothed twice using REMA or the rolling exponential moving average. The use of momentum/velocity assures that lag is minimized, and the use of double smoothing reduces the noise component. The DVST can be used as either a relative strength indicator, or a trend indicator. DV Self-Adaptive Slow (DVAS)/ DV Self-Adaptive Fast (DVAF): Both DVAS and DVAF are Level 1 class self-adapters that resample the prevailing distribution of the underlying to match with indicator signals to determine whether the best direction to trade an indicator is mean-reversion “MR” or trend “TR.” They can be applied with an indicator chosen by the user, but are best suited to shorter-term or intermediate term indicators. The self-adapter also determines the best levels to buy and sell using a given indicator by quickly adapting to the new distribution of returns for the underlying. The DVAS is less sensitive and tends to change more slowly while the DVAF rapidly adjusts to current conditions and potentially noise. There is a tradeoff to using both and the best way is to use one in conjunction with the other.

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DV Indicators

[Glossary of Indicators]

CSS Analytics Adaptor One (CSSA): This is the first institutional class entrant of the DV Indicators—it is a Level 1 Adaptive short-term mean-reversion indicator that looks at multiple time frames and different measures of volatility and fracticality. It dynamically self-adjusts to account for these factors to avoid making costly errors in buy/sell decisions. CSSA is more robust than the standard DV Indicators and works on a wider range of markets and stocks—especially entering at more extreme levels. It is a small preview of the future which will include Level 3 and Level 4 class that will have multiple layers of adaptation and self-adjustment. CSSA is the frame of a new class of indicators that will represent compact artificial intelligence machines.

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