# Geometric Index

Hi,

I have perhaps a tricky issue. In an very interesting article by Darren about how to create a custom index (How to Create an (Accurate) Custom Index; https://www.optuma.com/custom-index) he recommends using a geometric average calculation. A very good idea.

So I have created a custom index of four German stock (SAP - SAP.GR; Linde - LIN.GR; Siemens - SIE.GR and Allianz - ALV.GR) using the custom code editor.

The formula is the following: POWER(POWER=0.25, SAP:GR * LIN:GR * SIE:GR * ALV:GR )

The formula works fine. What the issue for me is to understand the performance of the custom index.

I have crated a Relative Comparison Chart of the four stocks, the DAX, and the custom index (DAXTOPW).

As you can see from the screen shot, all four stocks have outperformed the DAX as well as the custom index by a wide margin (base date 03/06/2009).

Here is my problem: How can it be that the four stocks have outperformed the DAX by a really wide margin AND the custom index of these four stocks has underperformed the DAX?

Is it perhaps not possible to calculate a percent change performance from the geometric index since it already used percentage changes to calculate it?

I have also created a Relative Index Comparison chart to the DAX. This chart also shows a underperformance of the custom index to the DAX.

Thanks,

Thomas

Hi,

I have solved my issue. I made a serious mistake!

I have entered incorrectly manually the codes for the German stocks, what a mistake!

The correct code is: POWER(POWER=0.25, SAP.GR:MajorEuro * LIN.GR:MajorEuro * SIE.GR:MajorEuro * ALV.GR:MajorEuro )

By the way, the geometric mean index formula for calculating a custom index as described by Darren in his article “How to Create an (Accurate) Custom Index” is the most easiest and accurate calculations possible. I have tried some other index calculations but either they were wrong or had the same results as the geometric mean index but much more complicated.

If you have the Custom Market Breadth module enabled on your account then there is now a better way to create these indices:

1. Save the list of symbols that you want included in the index to a Symbol List
2. Click on Data > Market Breadth
3. Create a new breadth ticker symbol and select the Symbol List created in step 1
4. Use CLOSE() as the script formula and Geometric Average as the Breadth Type
5. It's best to use a static Start Date (eg Jan 1st , 2018) so the line stays consistent
See the video here: https://youtu.be/uTDb1IfGAoE