Shannon Entropy

22. Okt. 2019

Here is a unique way of looking at your price & volume information. Utilize the calculated value of "Shannon Entropy". This is a measure of "surprise" in the data, the larger the move or deviation from the most probable value, the higher the new information gain. What I think is so interesting about this value, is the smoothness that it displays the information without using moving averages. There is a lot of meat on this bone to be incorporated in other scripts.

H = -sum(prob(i) * log_base2(prob(i)))

I've included the typical way that I've been experimenting with this, which is the difference between the volume information and price information. I've included the option to turn either price or volume data off to see the Shannon Entropy value of either value. There are a ton of complex scripts out there trying to do what this calculation is doing in 3 lines.

As with anything, there are no free lunches, so you can nicely see as you lower the lengths you'll quickly learn where your nyquist frequencies are at, you'll want to work at about double the noisy value at a minimum.