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Daily Speculations The Web Site of Victor Niederhoffer & Laurel Kenner Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter; a forum for us to use our meager abilities to make the world of specinvestments a better place. |
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4/2/2004
Reflections on an Air Hockey Game, Victor Niederhoffer
The little daughter here and I discussing the best way to score
the puck in air hockey. It led to discussions of angle of
incidence, equals the angle if reflection. The angle of
incidence being the angle below relative to the perpendicular
and similarly for the reflection relative to that same
perpendicular. The solution is to extend the line from the goal
to the pocket, at an equal distance to the side, and then
hitting the puck at the point on the side of the table that
connects the extension of the line with the point you're
hitting from.
A little Google research led to
applications in pool, squash, the game of pong, mirrors,
rainbows, radar, sound, the theory of relativity, the form of
trees, the Nigerian "I got $30 million for you " scam, and how
nature organizes itself.
This led me to think of more direct specinvestment implications. The speed with which price swings back from one extreme to another would seem to correspond closely to the angles of incidence and reflection. Presumably some technical analyst has drawn a diagram of this without testing or quantifying it and presumably it relates to something called speed resistance or Gann angles, mystical concepts I've come across.
I propose a simple fruitful way of applying this quantitatively. Consider the consecutive 20 day maxima in stocks. Such occurring when today is the highest price that has occurred in the previous 20 days. but consider these when they are separated by a 20-day minimum. compare the move from minimum to maximum relative to time, i.e., compute a ratio, of the swing relative to time. then compare the consecutive values of this ratio to find out the predictivity of large and small value of this ratio. Then generalize the question for 5-day max and minima et al. and other markets. Someone's going to tell me that technician x already did it. And that Magee has it in the Technical Analysis of Stocks. But still, a rich way of looking at things that playing with and like a kid might inspire.
Jeremy Lyter
replies:
The angle shot in air hockey is a good one. Another shot
worth considering is down the middle with a high degree of
force. This shot works well after faking an angle shot and
then blasting it down the middle. I m sure you have used
similar techniques while playing squash. Market implications
concerning this post would be related to air hockey and
physics. It might be interesting to measure the speed of a
security from point A to B trying to predict
(quantitatively) how far it will travel in that same
direction to C. A security like a rolling ball would have
other forces acting on it which you could quantify, compute,
and adjust for. Once you have this number you could rework
the problem and statistically compute the probability of
this trend continuing for an X time period. After you have
your number there is 100% probability for 1 second that this
trend will continue, 2 seconds 99% so forth and so on.
Someone may have a method such as this but I m not sure.
Another interesting idea would be to study the re-growth of
forests after a major fire. This could be used as a model
for understanding the recovery of the stock market after a
crash or correction. You could also look into if growth rate
changes because of how the fire was started. If it was a man
made or occurred naturally.