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    Trend Mode & Cycle Modes

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    _karr99
    This document discusses John Ehler's approach to identifying trend modes and cycle modes in the market. It introduces the concept of decomposing market movements into a perfect trend component and a perfect cycle component in order to determine which mode is dominant. It then describes Ehler's methods for recovering the trend slope, cycle component, cycle amplitude, and calculating trend vigor to identify the prevailing market mode. These techniques are implemented in EasyLanguage code examples and available in Ehler's MESA software and other free tools on his website.

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    Trend Mode & Cycle Modes

    Uploaded by

    _karr99
    610 views17 pages
    This document discusses John Ehler's approach to identifying trend modes and cycle modes in the market. It introduces the concept of decomposing market movements into a perfect trend component and a perfect cycle component in order to determine which mode is dominant. It then describes Ehler's methods for recovering the trend slope, cycle component, cycle amplitude, and calculating trend vigor to identify the prevailing market mode. These techniques are implemented in EasyLanguage code examples and available in Ehler's MESA software and other free tools on his website.

    Original Description:

    MODESLeft-Brained Concepts for Traders in their Right Minds

    Original Title

    Trend mode & cycle modes

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    This document discusses John Ehler's approach to identifying trend modes and cycle modes in the market. It introduces the concept of decomposing market movements into a perfect trend component and a perfect cycle component in order to determine which mode is dominant. It then describes Ehler's methods for recovering the trend slope, cycle component, cycle amplitude, and calculating trend vigor to identify the prevailing market mode. These techniques are implemented in EasyLanguage code examples and available in Ehler's MESA software and other free tools on his website.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    610 views17 pages

    Trend Mode & Cycle Modes

    Uploaded by

    _karr99
    This document discusses John Ehler's approach to identifying trend modes and cycle modes in the market. It introduces the concept of decomposing market movements into a perfect trend component and a perfect cycle component in order to determine which mode is dominant. It then describes Ehler's methods for recovering the trend slope, cycle component, cycle amplitude, and calculating trend vigor to identify the prevailing market mode. These techniques are implemented in EasyLanguage code examples and available in Ehler's MESA software and other free tools on his website.

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    You are on page 1of 17

    John Ehlers

    IDENTIFYING
    TREND MODES and CYCLE MODES
    Left-Brained Concepts
    for Traders in their Right Minds

    John Ehlers

    2008 Charles H. Dow award runner-up

    Author
    MESA, and Trading Market Cycles
    Rocket Science for Traders
    Cybernetic Analysis for Stocks and Futures

    Website
    www.mesasoftware.com

    TRADING IS EASY
    John Ehlers

    In the Trend Mode:


    Buy and Hold when trend is up
    Sell and Hold when trend is down

    In the Cycle Mode:


    Buy at the cycle valley
    Sell at the cycle peak

    TRADITIONAL TECHNOLOGIES
    John Ehlers

    Trend Mode
    Data Smoothers (moving averages, etc.)

    Cycle Mode
    Oscillators (RSI, Stochastic, etc.)

    Compromise Solutions
    Adaptive moving averages, KAMA, VIDYA, etc.
    I have found them not to be very effective.

    THE REAL PROBLEM


    John Ehlers

    Suppose an RSI signals a valley


    The trading action is to buy

    However, the market keeps going down


    In hindsight a trend mode has started

    Oscillators and Moving Averages often give


    opposite signals
    There are a jillion fixes suggested

    THE REAL PROBLEM IS


    HOW TO IDENTIFY THE CORRECT MARKET MODE
    5

    MARKET MODE IDENTIFICATION


    John Ehlers

    First, create a simplified model of the market


    The simple model has two components
    A perfect trend
    A perfect cycle

    Superimpose the two components for the


    composite model
    Enables subsequent decomposition into the
    components

    The Simple Model


    John Ehlers

    Trend = Black
    Cycle = Red
    Composite = Blue

    TREND SLOPE RECOVERY


    John Ehlers

    Knowing the cycle period, the Trend Slope is


    ALWAYS the momentum across the full cycle
    period.

    CYCLE RECOVERY
    John Ehlers

    Oscillators often lose the cycle amplitude


    I prefer a BandPass Filter
    Rejects low frequency (trend) components
    Rejects high frequency (noise) components
    Retains cycle amplitude (phase to some degree)

    EasyLanguage Code:
    Inputs:

    Period(20),
    Delta(.1);
    Vars:
    gamma(0),
    alpha(0),
    beta(0),
    BP(0);
    beta = Cosine(360 / Period);
    gamma = 1 / Cosine(720*delta / Period);
    alpha = gamma - SquareRoot(gamma*gamma - 1);
    BP = .5*(1 - alpha)*(Close - Close[2]) + beta*(1 + alpha)*BP[1] - alpha*BP[2];
    Plot1(BP,BP", Red, 2);

    Cycle Component for MSFT


    John Ehlers

    Assumed 20 Bar Period (monthly cycle)

    10

    CYCLE AMPLITUDE RECOVERY


    John Ehlers

    Remember this from trigonometry?


    1 = Sin2(x) + Cos2(x)

    The cycle component is a sine wave


    A Cosine is a Sine delayed by one fourth of a cycle
    period

    We use the trig identity to find the power in the


    cycle component

    Average across the cycle period for smoothing


    Take the square root to get the RMS wave amplitude
    Multiply by 1.414 to get the peak wave amplitude
    Double to get the peak-to-peak wave amplitude

    11

    EasyLanguage Code Cycle Amplitude


    John Ehlers
    Inputs:

    Period(20),
    Delta(.1);

    Vars:

    gamma(0),
    alpha(0),
    beta(0),
    BP(0),
    Power(0),
    count(0),
    RMS(0),
    PtoP(0);
    beta = Cosine(360 / Period);
    gamma = 1 / Cosine(720*delta / Period);
    alpha = gamma - SquareRoot(gamma*gamma - 1);
    BP = .5*(1 - alpha)*(Close - Close[2]) + beta*(1 + alpha)*BP[1] - alpha*BP[2];
    Power = 0;
    For count = 0 to Period - 1 Begin
    Power = Power + BP[count]*BP[count] + BP[count + Period / 4]*BP[count + Period / 4];
    End;
    RMS = SquareRoot(Power / Period);
    PtoP = 2*1.414*RMS;
    Plot1(PtoP, "PP", Yellow, 2);

    12

    TREND VIGOR
    John Ehlers

    Trend Vigor is the ratio of the (smoothed)


    trend slope across one full cycle period to the
    cycle peak-to-peak amplitude.
    If the ratio is greater than one the trend
    component swamps the cycle
    Dont stand in front of the train
    You can still use the cycle to enter the trade at the
    best time in the direction of the trend

    If the ratio is less than one the trend has a


    minimum effect on the cycle
    Use your favorite oscillator (mine is the Bandpass
    filter)
    13

    TREND VIGOR FOR MSFT


    John Ehlers

    14

    CYCLE PERIOD IDENTIFICATION


    John Ehlers

    Assume a period based on fundamentals


    Simply count the number of bars between
    successive major peaks or major valleys
    Contiguous bank of Bandpass filters
    Corona charts (free)
    www.mesasoftware.com

    Fourier Transform
    Fourier Transform for Traders (free)
    www.mesasoftware.com

    MESA

    15

    John Ehlers

    QUESTIONS?

    16

    John Ehlers

    THANK YOU FOR ATTENDING THIS WEBINAR


    GOOD TRADING

    17

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