Quantitative Analysis  |  FEB 2005

Fourier Transforms As An Aid To Decision-Making by Alok Srivastava

Stocks & Commodities V. 23:2 (56-59, 63): Fourier Transforms As An Aid To Decision-Making by Alok Srivastava Interested in improving the performance of your indicators? It may be worth your while to gain an understanding of Fourier transforms, frequency analysis, and inverse transformations. Traditionally, technical analysis has been used to detect and interpret patterns in past security prices to provide insight into future price movement. This, in turn, has lured researchers to try to beat the markets consistently, using a range of techniques varying from mathematics, physics, and economics to psychology. In this article, I will focus on the use of Fourier transforms together with technical analysis in making trading decisions. FOURIER TRANSFORMS The application of Fourier transforms has been well established in fields like digital signal processing (DSP), medical diagnostics, image processing, the media, and so on. The Fourier transform breaks up a signal from the time domain to a frequency domain, characterizing signals and letting you see order where there appeared to be none. For this article I used the transform to convert raw data into useful information to aid in making trading decisions. Many technical analysis indicators seem to work well for specific kinds of patterns. Unfortunately, there are no indicators that can take into account all of the possible characteristics that a price series can exhibit. I will show you how to incorporate stock price volatility so your indicators can adapt accordingly.

by Alok Srivastava