When predicting Forex price using HMM what, typically, are the states and what are the observations?
When predicting Forex price using HMM what, typically, are the states and what are the observations?
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TotoposDiagramChaseApp · External communityPost link
External question — Quantitative Finance Stack Exchange
Author: TotoposDiagramChaseApp
Original post: https://quant.stackexchange.com/questions/37388
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I understand their abstract definition but having trouble applying the HMM method to Forex prices. What should the observations be? Then what should the states be (like "hot", "cold", etc.)?
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xav · External communityPost link
External answer — Quantitative Finance Stack Exchange
Author: xav
Original post: https://quant.stackexchange.com/a/37389
License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/
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Your decision. You can define the states to be "positive return" or "negative return". So if the return is negative, then its state would be that "negative return".
Or, you could even model them with continuous emission so as to define a state with a specific mu and variance. So that given the return at time T, you can say "it could technically be possible that this return be in any one of these states, but it's most likely that it's at this state given its mu and variance"
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Quoted from Forex.com.bd-Editorial External answer — Quantitative Finance Stack Exchange Author: xav Source score (net votes, not local likes): 3 Original post: https://quant.stackexchange.com/a/37389 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Your decision. You can define the states to be "positive return" or "negative return". So if the return is negative, then its state would be that "negative return". Or, you could even model them with continuous emission so as to define a state with a specific mu and variance. So that given the return at time T, you can say "it could technically be possible that this return be in any one of these states, but it's most likely that it's at this state given its mu and variance"
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