Trading Techniques  |  JUL 2000

Optimal Detrending by John F.Ehlers

Optimal Detrending Did you know that a detrended signal, combined with an optimum smoothing filter, can produce an extremely responsive oscillator-type indicator that catches every cyclic turn as it happens? It’s true! Here are the details. All pulse echos here must be a jillion ways to detrend price data, and a good chunk of them have already been explored in print. Given that, I had to have a new and significant approach to the subject - and here it is. I discovered that a detrended signal, combined with an optimum smoothing filter, can produce an extremely responsive oscillator-type indicator. I borrowed the concept of this new detrending approach for the markets from radar circuit designs, so to understand how it works, let’s first take a look at how radar works. To refresh your memory, radar (which is an acronym, sort of, for radio detecting and ranging) works by transmitting a high-powered radio-frequency (RF) pulse and listening for the return echoes from various targets. RF energy travels at the speed of light, and so the round-trip time for an echo comes out to 12.4 microseconds per mile. The distance of the target from the transmitter is determined by measuring the time it takes for the echo to return. After sufficient time has elapsed so no more echoes are expected, the radar transmits another pulse. The process is repeated, and the time between pulses is referred to as the pulse repetition interval (PRI).

by John F. Ehlers