AEdge Local Asymmetry – Cumulative Probability (or LACP) is a mouth full, but it isn’t as complicated as it sounds. Formally, it is the cumulative distribution function of a proprietary asymmetry estimate based on data from a running lookback window. In laymen’s terms that means it essentially works by measuring the natural pull up or down of the most recent data and assigns a probability to the current pull (think of it as measuring the directional force acting on price changes). This probability is cumulative, meaning it represents the probability of the data being where it is now, or lower. So, a value of 0.25 means there is a probability of 0.25 (25%) that we will see this specific asymmetry, or lower, assuming the asymmetry was estimated correctly.
Note: The indicator does not plot the proprietary statistic representing the asymmetry itself, only the cumulative probability of that statistic.
The indicator consists of one moving line and three static lines. The moving line represents the cumulative probability. The upper and lower static lines represent the upper and lower percentile thresholds (more about that in a second). The final middle line just represents the mean (a.k.a. the 50% probability line, or 50th percentile).
A percentile is just a fancy word for a value on a scale between 0 and 100 that represents cumulative probability.
If the current pull is outside the upper percentile threshold, the current pull is more positive (upwards pulling) than expected and is more likely to regress back down to the mean. Vice versa for the lower percentile threshold. When this happens, it means the pull lessens and this usually translates to what chartists tend to call “consolidation ranges” (i.e., periods of sideways movement), or deceleration (momentum lessens).
There are multiple possible uses for this indicator in your analysis. Here are a few examples:
- When the cumulative probability is higher than the upper percentile threshold or lower than the lower percentile threshold, momentum is more likely to die down over the next few bars.
- When the cumulative probability is higher than 0.5 (the 50th percentile, or mean, line), the indicator estimates that there is an upwards pull in the recent data.
- When the cumulative probability is lower than 0.5, the indicator estimates that there is a downwards pull in the recent data.
The indicator settings have three main parameters:
- The first parameter, Data Source, sets the input to the indicator. This defaults to the close price of the main chart. You can change this to any other data source found on your chart.
- The second parameter, Number of Bars, under Lookback Window, sets the number of bars to use when estimating the pull (the asymmetry statistic). The cumulative probability is then estimated from the asymmetry of this number of bars times 100 (max 4999 bars). This is why the indicator does not draw if you look far enough back in history.
- The third parameter, Significance Level (%), determines what the upper and lower percentile thresholds are. Half of it is allocated to the upper threshold and half of it is allocated to the lower threshold. For example, if this setting is set to 10%, 5% (0.05) is allocated to the upper threshold (1 – 0.05 = 0.95), and 5% (0.05) is allocated to the lower threshold.