The Indicator Edge Analyzer for Quantacula Studio calculates Edge Factors for every indicator (including extensions) that you have installed. The Edge Factor expresses how much of an edge each indicator provides compared to the return of the overall market. The Analyzer uses three different analysis methods to produce six Edge Factors.
After you install the Indicator Edge Analyzer extension from the product page, the next time you launch Quantacula Studio you will see it under the Tools menu.
When you launch the tool, you are presented with a table that includes a row for each indicator installed on your system. Configure the analysis by selecting the desired testing universe, scale, and date range. When you are satisfied with the settings, click the Analyze button the begin the analysis.
By default, the Analyzer creates indicators with a period of 20. You can change this by entering a different value in the Indicator Period control. As the Analyzer creates indicators, it examines their parameter values. For the first parameter that it finds containing the text "period", it assigns the value that you specify here. After you change the indicator period, the list updates to reflect the new indicators under consideration.
The Analyzer computes Edge Factors for each indicator available in your Quantacula Studio installation.
Edge Factor = Average Return when Indicator is in Signal State / Average Return of Overall Market
The Average Return is calculated as a percentage profit after 5 bars, but you can change this value in the Return After N Bars control. In the example we'll use below, we analyzed the Q-Premium Dow 30 for the past 10 years. The average 5 day return in this universe came out to 0.14%.
After you run the analysis, you'll see the average 5 day return of the universe, only counting the observations where each indicator was in its signal state. There are 3 different analyses, each with its own definition of signal state.
After you complete the analysis, you can sort by any of the columns to see which indicators had the best Edge Factors for the three different analysis methods. Since each analysis method has two components (Overbought/Oversold, Above/Below signal line, Consec Up/Down), the results include 6 distinct Edge Factors.
Here we sort by Oversold Edge Factor, and see that when the RSI indicator was below its oversold value of 30, the average 5 day profit was 1.49%. 1.49 divided by the overall market average return of 0.14 results in an Edge Factor of 10.35. It was clearly advantageous to take positions in the Dow 30 stocks when RSI was oversold.