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Dr. Van Tharp developed this Formula for Trading Systems. Later he found out that the SQN Indicator is a very powerful to measure the trendiness.
He applied the SQN formula to the daily percent price change of a stock or an index, it proved to be an excellent measure of the quality of an trend.
When you love the momentum and relative strength concept this is a great indicator for you, because relative strength and traditional momentum indicators do not focus on the volatility of a market.
With the SQN you solve the problem.
For example you look for trending stocks that have an stable und high quality trend for 100 periods. The SQN Indicator will show you if the trend ist high quality.
Van Tharp describes the Quality of Stocks, Indicies, Currencies and Commodities with this SQN Scores:
Score: 1.6 - 1.9 Below average, but trade-able
Score: 2.0 - 2.4 Average
Score: 2.5 - 2.9 Good
Score: 3.0 - 5.0 Excellent
Score: 5.1 - 6.9 Superb
Score: 7.0 - Keep this up, and you may have the Holy Grail.
What says the SQN Score: For Example a stock have an SQN Value of 2.8 that means the Performance over the last 100 Periods was 2.8 bigger then the Standard Deviation of the Stock.
So if you screen your stock universum look at stocks that have an SQN Score of 2.5 or higher and look at this great Charts. This Indicator would be an great filter to finding stocks trending.
You can change the period you looking for. But my best results was with an half year -> 100 days. The Minimum Period should be 25.
For more Infos you can read Van Thaprs Books.
To use this indicator on a chart, simply type:
a = sqni(100);
plot(a, "System Quality Number");
Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
