Overview – The Hurst Exponent can be utilized in trend trading investment strategies. An investor would have a look at stocks that reflect strong persistence. The H exponent has been used by algorithmic traders in order to predict mean-reversing time strategies like pairs trading, in which the spread between two assets is a mean-reverting.

In This Article –

What is the Hurst Exponent Indicator?

How to analyze a chart using Hurst Exponent Indicator?

How to use Hurst Exponent Indicator on KEEV?

Category – Trend

Type –Lagging

What is the Hurst Exponent Indicator?

Hurst Exponent is a measure of the behavior of the market. It determines whether the market behaves in a random, trending or mean-reversion manner. This can help in choosing the right trading strategy for the market.

A Hurst Exponent of 0.5 means that the market in the long term follows a random walk. In such a situation, in the long run, any trading strategy would be a zero-sum game.

If the Hurst Exponent is observed to be above 0.5, the market reflects trending behavior. Past moves here are similar to current moves

If the Hurst Exponent is reflecting below 0.5 then the market shows a reverting behavior. If it went down in the past then there are chances that it will reverse its direction in future.

How to analyze a chart using Hurst Exponent Indicator?

To learn how to analyze the chart using the Hurst Exponent Indicator let's take a look at 300 daily returns of Exxon Stock. We can define these as h(1), h(2)……h(300).

Let's calculate the mean of these 300 returns. We name it M.                                                                                                

M= (1/300) [h(1) + h(2) +………+ h(300)]

Now we will calculate the deviations from the mean which we name as x(1), x(2)….x(300). The 300 deviations from the mean would be:-

x(1) = h(1) – M, x(2) = h(2) – M, …x(300) = h(300) - M. These deviations are shown in green in Chart 1.  (The average of these deviations comes to zero)

Now we calculate the Y’s which are shown in red in Chart 1.

Y(1) = x(1) , Y(2) = x(1) + x(2), ………Y (300)= x(1)  + x(2) + …..x(300).

Chart 1

Now we determine the maximum Y and minimum Y and apply subtraction. This gives us the range R.

R= Max [Y] – Min [Y] which is in blue. Now we calculate the Standard Deviation of the h’s :

S= STDEV [h(k)]

From the above chart calculation we got two magic numbers :

n = 300, R /s = 0.225 /0.0462 = 4.87.

This gives us one point on chart 2 i.e log (300) = 5.70 and log (4.87) = 1.58.

Chart 2

The above Chart 2 gives us an estimation of the Hurst Exponent H = 0.478. This is close to 0.5 which indicates that returns of XOM are random and uncorrelated.