Below article discusses combining statistics with trading. **What is your opinion?** Is this stochastic process a promising approach for statistical trading?

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https://www.forexfactory.com/showthread.php?t=562689

**Autoregressive Model**

Autoregressive (AR) Model is a stochastic process representation for time series. In this model, the next variable of interest (e.g., next price) is modeled with linear combination of previous value(s) in a stochastic manner,

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https://www.forexfactory.com/attachm…1&d=1445294734

where **c** is a constant, **y_t** is the variable of interest at time **t** and **e_t** is white noise. This stochastic process is usually referred to as an **AR(p)** model.

You can find more information about this stochastic process here.

**Trading Algorithm**

The trading algorithm is summarized below:

0. At the beginning of everyday’s candle (i.e., the open price of the day) the algorithm performs the following steps:

1. Compute the trend (e.g., the average) of the past **N** days’ close price, which is called **P[]** array.

2. Remove the trend from **P[]**, store the result in **D[]** array.

3. Estimate the parameters of an AR(1) model.

4. Using **D[]** and the estimated model, perform Dickey-Fuller test. If **D[]** is stationary, go to (5) else go to (0)

5. Predict the next value of **D[]** (which is D[N+1]) using the estimated AR(1) model.

6. **decision <- empty**

6. If **D[N+1]>D[N]**, then **decision <- Buy, Close Sell** else if **D[N+1]<D[N]**, then **decision <- Sell, Close Buy**

7. Execute the decision.

8. Go to (0)

**Expert Advisor**

I developed an EA for testing this trading idea based on AR(1) model. Here is a backtest result from 2000 to 2015 on EURUSD:

Attached Image (click to enlarge)

https://www.forexfactory.com/attachm…1&d=1445296994

**Discussion**

This trading idea arises a set of questions such as:

- Is this stochastic process (i.e., autoregressive model) a promising approach for statistical trading?
- How can we improve the trade logic?
- Does SL/TP settings for trades improve the results?
- What if we increase
**p**in AR(**p**) model? - Would it be more profitable if we use ARMA(p,q), ARIMA(p,d,q) and ARFIMA(p,d,q) models?
- What about non-linear autoregressive models?
- …

I am attaching the EA here. Hopefully any further improvement in the strategy would result in a newer version of the EA to test, and who knows, trading live!