EdgeWare FastGraph Version 3 - Manual (Page 57)

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data intensive and this chapter will give a brief overview. Anyone with a deeper interest
is directed toward the Edgars book.
The HE works with “time series data” which for our purpose will be the daily NAV of a
fund or index. The first step is to take the logarithm of the ratio of each daily NAV di-
vided by the previous day’s NAV.
The result of the first step is divided into a number of time series. If working with 100
days of daily data, for example, you may divide it into four periods of 25 days each. The
average value is calculated for each of these four periods.
The next step is to find the “accumulated departures” from the average for each of the
four periods. Accumulated departures are calculated by taking the sum of each value in
the period minus the mean value of the period.
Next, a range is calculated for each period which is simply the maximum value minus the
minimum value for each period.
A standard deviation is calculated for each of the four periods, and the range for each of
the four periods is divided by the standard deviation of each period. This result is called
R/S. An average R/S value is calculated by summing the R/S for each of the four periods
and dividing the sum by four.
We are almost finished. The above result gives one value of R/S for a single period of
time, i.e., number of days, in this case 25 days. To calculate the HE we need to find an
R/S value for several different number of days, i.e., 20, 30 40 etc. The R/S values can be
plotted vs. the different number of days on log/log paper and the HE will be the slope of
the line. FastGraph calculates the HE by a mathematical curve fitting routine.
FastGraph requires two values when it calculates the HE. The Period is the maximum
number of market days used to calculate the HE. The number of sub periods is the num-
ber of different values of time to curve fit. If you see values of HE less than zero or
greater than 1, increase the number of sub periods to get a better curve-fit. The suggested
number of sub-periods is five. The number of days to use should be one hundred or
more.