What is the Theory Behind WAV ?
Because all markets have different degrees of weak-form efficiency, prior and current market action have varying utility in forecasting future action. When this utility is high, it makes sense to feed a trading system indicators that summarize aspects of past market activity. To not do so would be tantamount to pouring vital information down the drain. For example, suppose your SP500 forecast/trading system requires knowledge spanning the last 200 price-bars of each of five markets: S&P, Bonds, Yen, CRB, and DM. If this system were given only today’s prices and no historical data, performance would be seriously impaired. A problem arises when attempting to feed your system all 200 historical price samples from each market. Each forecast would require 1000 (5×200) input values. Professional traders realize this is too many and one must be very selective when choosing historical data for a model. So which samples do you use? Uniformly spaced sampling of historical prices, such as selecti
