The Lawrence Chan Blog

Since the crash of Bitcoin at Mt. Gox, people with Bitcoin trapped at Mt. Gox were in a total nightmare. They cannot withdraw money directly from Mt. Gox, they cannot really sell their Bitcoin to anyone else as people all trying to get back their money at once. This ongoing chaos has pushed Bitcoin price down to USD $100-$200 range at Mt. Gox only.

Now, a company called Bitcoin Builder has stepped in to take advantage of the situation. They are offering to take Bitcoin from other Mt. Gox clients at a steep discount rate. Anyone can arrange to transfer their Bitcoin within their Mt. Gox account to the Bitcoin Builder account at Mt. Gox. In exchange they get back a small percentage of Bitcoin back at any destination they have chosen.

Effectively Bitcoin Builder assumed the risk from the panic holders in exchange for a potential windfall.

A very smart move with limited risk!

http://www.coindesk.com/has-company-found-workaround-mt-gox-withdrawals/

The other interesting development from this fiasco is that some clients of Mt. Gox choose to protest against the company at its physical location. They have been met with less than helpful assistance from the Japanese government. This is definitely a new low in line with the other governments on how they treat the Bitcoin community.

http://www.coindesk.com/japanese-police-shut-down-protest-gox/

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Home page now sports a complete new look to improve clarity. More twisting of the page is likely but the overall new look is in place. Hope you all like it.

My part in this website facelift is not done yet though. I was lazy when I first posted many articles long time ago without proper tagging. Now I have to go back to each article to tag them properly so that they can show up easily based on user input. It will take me some time to complete that which means the new look for the Article section will be delayed.

There are other changes being made to the site as I type this update.

Will keep you all posted of our progress.

For now, enjoy the new look of our home page!

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A great article presented by Mr. Nassim Nicholas Taleb on the abusive use of Standard Deviation is a must read by anyone who is involved with trading. The article explained why standard deviation is not really a standard and how it is less than desirable as a yardstick to measure volatility in data series. What I am going to do here is to show how standard deviation measure up to mean deviation in actual market data.

When Not To Apply Standard Deviation

Standard deviation is not applicable in general in all time series analysis on financial data. The reason is very simple. When you have data that is expected to be distributed like a normal distribution (i.e. bell curve), the standard deviation formula gives you something meaningful. The moment you cannot be sure if there exists sure a distribution, yet you are still using standard deviation to estimate the behaviour of the data set, you are abusing the formula and making wrong inference about the data.

Since all data from financial markets demonstrate fractal-like behaviour with very fat tail, the use of standard deviation in any analysis is inappropriate. Unluckily we’ve observed such abuse in financial forecast everywhere. It is a shame to the human race that people call themselves educated yet plotting all these regression lines and reporting all kinds of boundary studies based on standard deviation figures on data that should not be handled that way.

Mean Deviation Is The Better Alternative

Mr. Taleb suggested in his article that Mean Absolute Deviation (MAD) is a better measure of distribution behaviour. In his article, Mr. Taleb already provided compelling evidence that MAD is superior to STD for all real-life data. I am not going to repeat what he says in the article. It is a good idea to at least browse through his article when you get the chance.

In my experience, standard deviation often reacts incorrectly while mean deviation does not suffer the same problem. In other words, if you choose to use standard deviation as your volatility measure, you will often encounter false positive signals because of sudden surge in standard deviation readings. If you substitute standard deviation by mean deviation, the problem will likely go away, giving you better results overall.

A Visual Explanation

Following is a Emini S&P 5-minute chart with Standard Deviation band and Mean Deviation band overlay onto the price series.

Two things stand out from the chart immediately.

First, the mean deviation lines (green lines) almost always bounding a tighter range in comparison with the range coverage by the standard deviation band.

Second, standard deviation band often continue to expand while mean deviation band already collapse in range.

It is a simple example showing why it is better to avoid standard deviation in your indicator toolbox.

The Mathematical Explanation

For those who wonder why standard deviation behaves like a bad boy, here is the technical explanation without using mathematical equations.

Standard deviation formula on a moving time window can be expressed by an induction formula. What that means is that as long as you know enough about the state of the standard deviation value up to the previous instance, you can derive the new standard deviation value from the state information and the input of the latest data point. This property implies standard derivation does not really give you completely new analytical information based on all the data points at this point. It is mostly derived from the past, the out-dated data.

Mean deviation is completely different from standard deviation. Every instance where you have to evaluate an answer, you need to completely recalculate the result based on all the data points again. No cheating like standard deviation, so to speak. Hence, every results you get from mean deviation is actually a completely new look at the data, giving you fresh information and new perspective.

Reference

2014: What Scientific Idea Is Ready For Retirement – Response from Nassim Nicholas Taleb

Wikipedia on Standard Deviation

Wikipedia on Mean Deviation

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Check out the complete new look at the Videos For Traders section.

It sports a new navigation menu with quick entry to watch any video in the collection.

Enjoy!

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We’ve consolidated the premium products and their online help pages into one organized vertical menu system.

Now that when you click the premium menu or access any pages related to the premium products, the vertical menu will show up allowing you to navigate them easily.

In doing so, the Signals menu and landing page is no longer necessary thus removed from the site-wide menu.

Some of you may notice the addition of the Videos menu. It is part of the planned changes and it is not completed yet.

Since renovation still in progress, sorry for any surprises it may bring you. =)

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