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Unformatted text preview: Identifying Breakout Moves Brett N. Steenbarger, Ph.D. www.brettsteenbarger.com Academic studies suggest that the price changes in markets form a leptokurtic distribution—not the normal distribution that we remember from our days in statistics classes. A leptokurtic distribution is one with a very tall peak at the (zero) center, quickly descending slopes on either side of center, and then fatter tails than would be found in the normal curve. Stated simply, a leptokurtic distribution means that there are many price changes around the zero area (mean reversion), but also more than normally expectable far from the mean. To the trader, this translates into markets that spend a large percentage of their time in a range bound mode, but then can trend unusually far and persistently in a single direction. This simple market reality sets up two distinct trading styles: one for a range bound market that fades moves away from the mean, with the expectation of mean reversion, and the other for breakouts from the range that will tend to trend in the persistent manner. These truly are different trading modes, as one will have you selling...
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This note was uploaded on 08/11/2009 for the course FINANCE Fixed Inco taught by Professor Proflim during the Three '09 term at University of Adelaide.
- Three '09