Project future trend of a stock with high positive autocorrelation
I am trying to understand autocorrelation
It says:
For example, if you know a stock historically has a high
positive auto-correlation value and you witnessed the stock
making solid gains over the past several days,
you might reasonably expect the movements over
the upcoming several days (the leading time series)
to match those of the lagging time series and to move upwards.
But this means that if a stock with high +ve auto-correlation is up today, then tomorrow it will be up also, and so on for the next day...up to infinity?
What am I missing? The way I am reading it, it seems that a stock with high +ve auto correlation that is in an uptrend will go to infinity.
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Auto-correlation is a statistical concept for measuring repeating patterns in series. In stocks it is of particular interest as if future prices can be reliably guessed from past prices a lot of money could be made.
Note, even in cases where auto-correlations are high and persistent (near 1) there is still some possibility that the next time period would be down even if the previous period was up. Now the important part here is that high and persistent auto-correlation also means once the price falls the next period the price is also more likely to fall! Once one period was down the next period is more likely to be down so the price does not need to go to infinity. Instead, it generally would display up and down trends.
Now, the key word above for investing is persistence. For stocks, auto-correlations are, at best, weakly persistent at reasonable time scales. So, even if a stock was highly auto-correlated during a previous period it is tough to make consistent money off of trading on these past trending patterns. This does not mean some people don't try...
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