Technical Analysis of STOCKS & COMMODITIES
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Article Archive For John F. Ehlers
DownloadLinear Predictive Filters And Instantaneous Frequency
ARTICLE SYNOPSIS ...Unless your technical analysis indicator can adapt to shifts in the dominant cycle of the data, the indicator is doomed to failure. How can you adaptively tune your indicators and strategy algorithms to changing market conditions, making them much more effective and reliable? How can you know when the market is in a state of high predictability? We'll find out...
Drunkard's Walk: Theory And Measurement By Autocorrelation
ARTICLE SYNOPSIS ...Here, we look at some of the basic issues that underlie technical analysis itself. And we introduce a new indicator, called "autocorrelation", you can use to test for correlation in the da...
Ultimate Strength Index (USI)
ARTICLE SYNOPSIS ...Introducing a new version of the RSI that has an exceptionally small amount of lag. Here's how you can calculate and use it...
Ultimate Channels And Ultimate Bands
ARTICLE SYNOPSIS ...Last time, we introduced an advancement in quantitative analysis for smoothing data with less lag: a new filter called the Ultimate Smoother. Here, we show you how you can put it to use in your indicators...
What Is The Real Meaning Of The EMA Alpha?
ARTICLE SYNOPSIS ...In an exponential moving average, the smoothing fac tor, also known as a weighted multiplier or alpha, is the parameter that determines how values in the lookback period are weighted. Weights decline exponentially as the data points get older. How is alpha found, and why is this significant? Here are some analytical and practical insights....
The Ultimate Smoother
ARTICLE SYNOPSIS ...First, we introduced you to a super smoother. Here, we introduce an ultimate smoother. It's an advancement you won't want to miss...
Every Little Bit Helps
ARTICLE SYNOPSIS ...It's simple but makes a noticeable improvement: You can reduce noise in the data by using an average of the open and close instead of using only the closing price. Here's how to do it...
Just Ignore Them
ARTICLE SYNOPSIS ...To avoid whipsaw trades, traders smooth the market data to get better and less-frequent trading signals. But smoothing filters have drawbacks, such as introducing lag. Here is an effective solution, and it's simpler than you might expect...
Recurring Phase Of Cycle Analysis
ARTICLE SYNOPSIS ...On this occasion of the 40-year anniversary of this magazine, S&C Contributing Editor John Ehlers takes a look back at technical analysis history and reviews what we've come to understand about cycles in the financial markets. His years of technical research on this topic has led to insights and advancements that he has shared with us in many articles, and continues to share here...
Ehlers Loops, Part 1
ARTICLE SYNOPSIS ...Introducing a new way to discretionarily predict bullish and bearish moves in the market...
Pairs Rotation With Ehlers Loops, Part 2
ARTICLE SYNOPSIS ...Last time in part 1, a new charting style named Ehlers Loops was introduced that could help you to gain predictive insights by the nature of the display. This time, we'll look at Ehlers Loops in action with a pairs trading example...
(Yet Another) Improved RSI
ARTICLE SYNOPSIS ...Over the years there have been many looks at this venerable, longstanding tool of technical analysis. Here, we introduce an improvement to the RSI that brings this indicator into the age of algorithmic trading. This improved RSI takes advantage of the Hann windowing technique described in an article earlier this year...
Inverse Fisher Transform Redux
ARTICLE SYNOPSIS ...Swing traders will welcome the improved timing capability of the indicator presented here, named the "elegant oscillator". It uses the inverse Fisher transform to help you spot reversion-to-the-mean opportuniti...
Windowing
ARTICLE SYNOPSIS ...In statistics and signal processing, when a waveform or data sequence is multiplied by a window function, the result is the part where they overlap, often thought of as the "view through the window." Windowing can improve the functionality of filters used for trading such as the simple moving average. Which window function works best for this? We'll find o...
Cycle/Trend Analytics And The MAD Indicator
ARTICLE SYNOPSIS ...Here, we introduce the moving average difference (MAD) indicator and explain the rationale behind its creation. You will find the indicator is robust yet reflects simplicity...
The MAD Indicator, Enhanced
ARTICLE SYNOPSIS ...Here, the MAD indicator introduced last month is made even better for technical traders. We'll explain how the MADH is created and how you can put it to use...
A Technical Description Of Market Data For Traders
ARTICLE SYNOPSIS ...What is the nature of market data? What wisdoms can be gained from studying it? Here is a brief summary of research into the nature of market data, from someone who has spent decades researching it, testing it, and trading it. Included is a technique to detect and demodulate the AM and FM components of cycles, so you can better ensure your timing signals are accurately accounting for the market data...
Creating More Robust Trading Strategies With The FM Demodulator
ARTICLE SYNOPSIS ...Market data is made up of cyclical components. Cycles contain both signals and noise. It's a concept that underpins market timing and can be crucial to success. Last month we introduced the concept of using the AM (amplitude modulation) and FM (frequency modulation) components of cycles to better time trades. In this article, we follow up with an example of how you can use this idea in your trading strategies. It's a process that just might be considered foundational to quantitative analysis...
The DMH: An Improved Directional Movement Indicator
ARTICLE SYNOPSIS ...The directional movement indicator originally developed by J. Welles Wilder has been a mainstay in technical analysis. It's time to modernize it...
Correlation As A Trend Indicator
ARTICLE SYNOPSIS ...Here, we introduce a new indicator: the correlation trend indicator. It could help you to identify the onset of a trend. It could also help you to detect the failure of a trend--thereby giving you an indication that a cyclic mode may be beginning...
Correlation As A Cycle Indicator
ARTICLE SYNOPSIS ...As traders know, markets have trend modes and cyclic (mean-reversion) modes. Last month, we introduced a new indicator--the trend correlation indicator--for trend trading, based on a straightforward yet novel concept. This month, we follow up with a second new indicator to help you profit in cycling markets...
Truncated Indicators
ARTICLE SYNOPSIS ...An ideal cycle indicator is one that will help you locate and track cycles in price data to better anticipate price. Here is a straightforward technique for improving how accurately a cycle indicator reflects price--including the handling of extreme price events such as the market experienced recently. Coding is provided to help you implement the technique...
Reflex: A New Zero-Lag Indicator
ARTICLE SYNOPSIS ...For indicators to be useful, the indications they produce can't arrive too late. Toward that all-important goal, here we introduce a new indicator plus a variation on that indicator that you will want to add to your charts...
Noise Elimination Technology
ARTICLE SYNOPSIS ...Reduce indicator noise and clarify the direction of your indicators using Kendall rank correlation, which measures the strength of dependence between two sets of variables. Here's how you can use it...
Fourier Series Model Of The Market
ARTICLE SYNOPSIS ...Traders are aware that cyclical activity can be observed in market data. Here's a way to use a Fourier series indicator to model the market and describe cyclic market activity so you can develop realistic trading strategy rules for swing trades...
A Peek Into The Future
ARTICLE SYNOPSIS ...We all know there is no crystal ball for the markets. But if you could get a signal in advance of other signals that are used by traders, that might be the next best thing. Here, we introduce a new filter that could help signal cyclic turning points...
Probability--Probably A Good Thing To Know
ARTICLE SYNOPSIS ...The idea of reversion to the mean is one that traders tend to take for granted. Can you confidently assume all indicators subscribe to the normal probability distribution? Here, we measure the probability distribution of a few indicators to determine if they can be used as part of your reversion-to-the-mean trading strategy...
RocketRSI - A Solid Propellant For Your Rocket Science Trading
ARTICLE SYNOPSIS ...Wouldn't it be great to know that there's a strong chance a cyclic reversal will take place? How many indicators can identify this event? The RSI is a favorite indicator among technical analysts. Make it a tad bit more flexible and it may help you find those high-probability reversal points...
Recursive Median Filters
ARTICLE SYNOPSIS ...Impulsive noise spikes or extreme price or volume data are not unusual in the financial markets and these extreme values can throw off your averaging calculations. How can you set up a data filter to remove these extreme price movements? This STOCKS & COMMODITIES Contributing Editor shows you a way to handle this by using a filter that discards all data except the median value...
The Deviation-Scaled Moving Average
ARTICLE SYNOPSIS ...Moving averages have two characteristics -- they lag and they smooth data. But there are different ways to tweak them. Here's one way to make them more adaptive to current prices and make the smoothing heavier...
The Reverse EMA Indicator
ARTICLE SYNOPSIS ...The exponential moving average is a popular indicator among technical analysts. But it has its shortcomings. Here's a look at how the indicator can be used so it results in minimum lag and provides crisper trading signals...
Measuring Market Cycles
ARTICLE SYNOPSIS ...If you haven't given much thought to why certain parameters are used in indicators, you may be interested to know that it has a lot to do with measured cycle periods. Here's how you can use these measured periods and apply them to your indicators...
The Super Passband Filter
ARTICLE SYNOPSIS ...Are low and high frequencies getting in your way? Here's a filter that will reject both of these extremes so you can focus on what really matters...
Aliasing
ARTICLE SYNOPSIS ...Since you are likely using sampled data when trading, there is a chance that there could be some distortions in the data. Here's what you can do to avoid those distortions...
Decyclers
ARTICLE SYNOPSIS ...Trends are great when they're moving in the direction you want them to. But when they reverse, you don't want to be caught off-guard...
Schrödinger's Cat
ARTICLE SYNOPSIS ...What information is contained in market data? Can you develop an indicator or trading system that can extract this information to provide an edge in trading? Here's a look...
Whiter Is Brighter
ARTICLE SYNOPSIS ...White noise, pink noise -- does it make a difference? It sure does, and here is how you can use noise theory to create an indicator with zero lag that works both as a countertrend oscillator and as a trend identifier....
Predictive And Successful Indicators
ARTICLE SYNOPSIS ...Have you ever thought about how the high-to-low price swings increase as the time interval increases on a chart? This tends to create more noise and distorts indicators. Here are a couple of filters you can incorporate into your trading system to smooth data and remove indicator distortions....
The Quotient Transform
ARTICLE SYNOPSIS ...Here's one way to detect a trend early and know how long to stick with it....
Corona Charts by John F. Ehlers
Measuring Cycle Periods by John F. Ehlers
ARTICLE SYNOPSIS ...Measuring Cycle Periods by John F. Ehlers Measuring cycle periods allows you to adjust your indicators so they adapt to current market conditions. Here's how. IF you want to make your indicators and strategies adaptive to current market conditions, you must first measure the cycle periods that are present in the data. Given that you know the dominant cycle, you can then use that information to dynamically adjust your computations. For example, you can set the observation period of the relative strength index (RSI) to be half the dominant cycle. I have previously described a practical way to ...
Trading In Your IRA by John Ehlers
ARTICLE SYNOPSIS ...Stocks & Commodities V. 25:3 (22-24): Trading In Your IRA by John Ehlers This concept lets you trade your IRA with performance that can beat the index dramatically. Trading in your individual retirement account (IRA) usually means selecting which mutual fund to buy. The performance of these mutual funds is gauged relative to the Standard & Poor's 500 or similar index. In this article I will describe some concepts that will allow you to trade your IRA with index-beating performance -- sometimes dramatically. Most IRAs do not allow trading on the short side. Selling short is just the flipside o...
Fourier Transform For Traders by John F. Ehlers
ARTICLE SYNOPSIS ...Stocks & Commodities V. 25:1 (24-34): Fourier Transform For Traders by John F. Ehlers When market conditions are variable, adapting to them becomes a challenge. Here's how you can use a dominant cycle to tune the relevant indicators so you don't have to drive through the fog. It is intrinsically wrong to use a 14-bar relative strength index (RSI), a nine-bar stochastic, a 5/25 double moving average crossover, or any other fixed-length indicator when the market conditions are variable. It's like driving on a curving mountain road in a fog bank with your cruise control locked -- and you've desp...
When To Trade With Cycles by John F. Ehlers
ARTICLE SYNOPSIS ...Stocks & Commodities V. 25:4 (32-34): When To Trade With Cycles by John F. Ehlers When should you trade the cycle mode in a market and when should you trade the trend mode? Find out with this indicator. In theory, trading with cycles is easy -- just buy at the valley and sell at the crest. This is just a variation of the old buy?low, sell?high dictum. In practice, however, trading with cycles is far more difficult. Just for openers, the very existence of market cycles is ephemeral and we must jump on them quickly to take advantage of any market inefficiency they represent. This is demonstrate...
Swiss Army Knife Indicator by John F. Ehlers
ARTICLE SYNOPSIS ...Stocks & Commodities V. 24:1 (28-31, 50-53): Swiss Army Knife Indicator by John F. Ehlers You've probably never heard of this indicator, but it has all the common functions such as smoothing and momentum generation. Find out why it's going to be your new best friend. This indicator does some unusual things, such as band-stop and band reject filtering. Once you program this indicator into your trading platform, you can perform virtually any technical analysis technique with it. This unique general indicator results from general digital signal processing (DSP) concepts for discrete signal netw...
Sidebar: Swiss Army Knife EasyLangague Code by John F. Ehlers
Modeling The Market = Building Trading Strategies by John F. Ehlers
ARTICLE SYNOPSIS ...Stocks & Commodities V. 24:8 (20-26): Modeling The Market = Building Trading Strategies by John F. Ehlers The correct model can form the foundation for comprehensive trading strategies. Modeling the market is important because you can build comprehensive trading strategies if your model is correct. One example of a successful model is the famous Black-Scholes model for options; a variety of options strategies have been spawned from it. Another historical model is the Hodrick-Prescott filter, which attempts to isolate the trend and cyclic components of macroeconomic data. It finds the trend b...
Sidebar: FRAMA EasyLanguage code by John F. Ehlers
ARTICLE SYNOPSIS ...Stocks & Commodities V. 23:10 (81-82): Sidebar: FRAMA EasyLanguage code by John F. Ehlers FRAMA EASYLANGUAGE CODE Inputs: Price((H+L)/2); N(16); {N must be an even number} Vars: count(0); N1(0), N2(0), N3(0), HH(0), LL(0), Dimen(0), alpha(0), Filt(0); ......
Fractal Adaptive Moving Averages by John F. Ehlers
ARTICLE SYNOPSIS ...Stocks & Commodities V. 23:10 (81-82): Fractal Adaptive Moving Averages by John F. Ehlers We all want to eliminate bad whipsaw trades. Here's a weapon you can add to your arsenal of technical indicators for just that purpose. The objective of using filters is to separate the desirable signals from the undesirable ones. The practical application of moving averages often involves a tradeoff between the amount of smoothness required and the amount of lag that can be tolerated. Moving averages have this problem because the price data is not stationary and may have different bandwidths over diffe...
What's The Difference by John F. Ehlers
ARTICLE SYNOPSIS ...Stocks & Commodities V. 23:3 (28-29): What's The Difference by John F. Ehlers What's the difference between the median and the average? It's what drives this new adaptive smoothing filter. Remember back in school when your teacher asked you what the difference was between the median and the average? I remember thinking, "Yeah, what is the difference?" as in, "Who cares?" As it turns out, you should care. It is exactly that difference that drives a unique new adaptive smoothing filter that I'm going to tell you about. Average and median filters eliminate extraneous data in fundamentally diff...
The Inverse Fisher Transform by John F. Ehlers
ARTICLE SYNOPSIS ...The Inverse Fisher Transform by John F. Ehlers How often have you been indecisive about entering or exiting a trade? Here's one way to get a clear indication. The purpose of technical indicators is to help time your decisions to buy or sell. Ideally, their signals should be clear and unequivocal, but more often than not you will find yourself crossing your fingers before pulling the trigger. Even if you have placed only a few trades, you will have experienced this. INVERSE FISHER TRANSFORM In this article I will show you a way to program your oscillator-type indicators to give clear, black...
Moving Average Computations, Made Easier by John F. Ehlers
ARTICLE SYNOPSIS ...Moving Average Computations, Made Easier by John F. Ehlers Presenting programming tricks to simplify coding indicators and strategies. A simple moving average of length N is computed by adding N values and dividing the sum by N. The process is repeated on a barby- bar basis. What could be easier? While conceptually simple, coding for long moving averages can quickly become wearisome because there are so many terms....
The RSI Smoothed by John F. Ehlers
ARTICLE SYNOPSIS ...The RSI Smoothed by John F. Ehlers Here's how you can enhance the performance of the RSI. Smoothing an indicator usually means a tradeoff between the amount of smoothing you desire and the amount of lag you can stand. In this article I will show you how the relative strength index (RSI), an indicator developed by J. Welles Wilder, can be smoothed and enhanced with a minimum of lag penalty. RSI DEFINED J. Welles Wilder defined the RSI as RSI = 100 ? [100 / (1 + RS)] where RS = (closes up) / (closes down) or = CU / CD RS is shorthand for relative strength. CU is the sum of the difference...
Using The Fisher Transform by John F. Ehlers
ARTICLE SYNOPSIS ...Using The Fisher Transform by John F. Ehlers Looking for better trading results? This indicator shows you how to identify price reversals in a timely manner. he common assumption is that prices have a Gaussian, or normal, probability density function (PDF). A Gaussian PDF is the bell-shaped curve you are probably familiar with, where 68% of all samples fall within one standard deviation around the mean. Do prices follow such a curve? No, but many people think so, and that mistaken assumption is why many trading indicators fail....
The Center Of Gravity Oscillator by John F. Ehlers
ARTICLE SYNOPSIS ...The Center Of Gravity Oscillator by John F. Ehlers Here's an indicator that identifies every major turning point without much lag. This new oscillator is unique in that it is smoothed and has essentially zero lag. The smoothing enables clear identification of turning points, and the zero lag aspect means action can be taken early in the move. This oscillator is the serendipitous result of my research into adaptive filters. While the filters have not yet produced the results I am seeking, this oscillator has substantial advantages over conventional oscillators used in technical analysis....
Zero-Lag Data Smoothers by John F. Ehlers
ARTICLE SYNOPSIS ...Zero-Lag Data Smoothers by John Ehlers Here's a technique that can reduce lag to nearly zero. A causal filter can never predict the future. As a matter of fact, the laws of nature demand that all filters must have lag. However, if we assume steady-state conditions -- that is, no new, disturbing events -- there are techniques we can use to reduce the lag of these filters to nearly zero. It turns out that such filters are useful for technical analysts with which to smooth data, and perhaps create some fast- acting indicators. This is possible because the steadystate assumptions are almost, but n...
Relative Vigor Index by John F. Ehlers
ARTICLE SYNOPSIS ...Relative Vigor Index by John F. Ehlers Here's an old concept brought to light using modern filters to make it a practical, useful indicator. Since the inception of STOCKS & COMMODITIES (happy 20th anniversary year!), there have been several developments in technical analysis that have merged old concepts with new technologies. Like the magazine itself, the indicator discussed here will also be merging the old and new. The relative vigor index (RVI) uses concepts dating back to the beginning of this magazine and also uses modern filter and digital signal processing theory to realize those con...
The Instantaneous Trendline by John F. Ehlers, Ph.D.
ARTICLE SYNOPSIS ...The Instantaneous Trendline by John F. Ehlers, Ph.D. Is it possible to have an instantaneous trendline? To say that a trendline is "instantaneous" may be presumptuous, but because you can compute a continuous trendline with modern technology and thus assess the action in the markets, the term is somewhat appropriate. A market can be in two modes -- a trend mode and a cycle mode. That means you can describe the general market as a combination of the two. If you apply a simple moving average (SMA) over the period of a dominant cycle, the dominant cycle component can be completely eliminated....
MESA Adaptive Moving Averages by John F. Ehlers
ARTICLE SYNOPSIS ...MESA Adaptive Moving Averages by John F. Ehlers What if you combined the power of maximum entropy spectral analysis with the Hilbert transform's ability to discern phase change? The MESA adaptive moving average (MAMA) adapts to price movement in a new and unique way. The adaptation is based on the rate change of phase as measured by the Hilbert transform discriminator I described in my December 2000 article. In that article I derived the Hilbert transform, which generates the real and imaginary components from the analytical price waveform. The arctangent of the ratio of the imaginary compon...
Nonlinear Ehlers Filters by John F. Ehlers
ARTICLE SYNOPSIS ...What If Linear Filters Won't Work For Your Tradable? Nonlinear Ehlers Filters Linear filters like moving averages are great for slow, "stationary" data. Unfortunately, prices aren't slow or stationary. By John Ehlers The most common filters that traders use are moving averages -- either simple moving averages (SMA) or exponential moving averages (EMA). These are linear filters. Linear filters are best for smoothing stationary, slowly varying signals that are corrupted with high-frequency noise. In this instance, "stationary" means that the rules that dictate the underlying process do not cha...
Squelch Those Whipsaws by John F.Ehlers
ARTICLE SYNOPSIS ...Squelch Those Whipsaws by John F.Ehlers What's real price movement and what's just noise? Figuring out the difference is vital, and here's an objective measure to help you out. Hey, good buddy! Ever operate a citizens' band (CB) radio? If you haven't, most CBs are relatively simple devices, usually with three controls: a channel selector, a volume control, and a squelch control. Squelch control is important to the operation of the radio because without it, there would be no way for the radio to distinguish between static noise and a real signal from a transmitter. Such a distinction can als...
Adaptive Trends And Oscillators by John F.Ehlers
ARTICLE SYNOPSIS ...Adaptive Trends And Oscillators The Twain Meets Here by John F. Ehlers Can the market be modeled as a combination of a trend mode and a cycle mode? This longtime S&C contributor says yes. Here, he explores two indicators to trade each mode; one is the new, adaptive version of an indicator originally introduced in 1996, and it does well in trading ranges but steps aside in trends. With this new version, you can address both modes of the market without interfering with the other Ñand that Õs something that traders have been waiting for....
Hilbert Indicators Tell You When To Trade by John Ehlers
ARTICLE SYNOPSIS ...Hilbert Indicators Tell You When To Trade by John Ehlers On Lag, Signal Processing, And The Hilbert Transform Here's one way to control moving average lag, using a little math and a little-known algorithm called the Hilbert transform to come up with indicators telling you when to trade. Two characteristics of moving averages are that they smooth the input data and they lag the input data. Their use and application is almost always a tradeoff between these two characteristics. The smoothing function removes the higher-frequency components (that is, the rapid up and down movements)of the inpu...
Optimal Detrending by John F.Ehlers
ARTICLE SYNOPSIS ...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 indica...
Phasor Displays by John F. Ehlers
ARTICLE SYNOPSIS ...Phasor Displays by John F. Ehlers A high-tech display pinpoints anomalies and trading opportunities in price behavior. Remember that famous glass of water? The one that optimists see as half full and pessimists see as half empty? An engineer, however, sees the glass as having been designed with too much capacity. So what we see is really a matter of perception. Market technicians have designed a variety of techniques to visualize what has happened and to predict what the future holds. Candlestick charts and point and figure charts are two examples of charting price data. When it comes to in...
Do Cycles Exist in the Market? by John F. Ehlers
ARTICLE SYNOPSIS ...This longtime S&C contributor explains the basis of the existence of cycles in market data. The markets are not always efficient; this is why trading decisions based on technical analysis work. Chart patterns that are discernible, technical events such as double bottomsÝ and Elliott wavesÝ, allow technically based traders to make intelligent deci-sions. Another key discernible event that technical traders may make use of comes in the form of cycles. As a rule, it is not a task of much difficulty to identify cycles; a simple ap-proach, such as measuring the distance between successive lows, ca...
V.15:11 (505-509) Cycle Measurements by John F. Ehlers
ARTICLE SYNOPSIS ...The author of Mesa and Trading Cycles and developer of the MESA software series presents why you should dynamically adjust your indicators due to the change in market cycles. There's no doubt about it: Market cycles can be difficult to identify. But if they can be measured, the payoff can be substantial. By measuring cycles, we have an independent parameter that frees us from using static indicators such as stochastics, the relative strength indicator (RSI), moving average convergence/divergence (MACD) or even moving averages with fixed settings. Mea-suring cycles enable us to dynamically adj...
Stay In Phase by John F. Ehlers
ARTICLE SYNOPSIS ...Stay In Phase by John F. Ehlers This cycles software specialist discusses an indicator based on cyclical analysis. A cycle is one market characteristic that can be scientifically measured. Although they can be measured, they are still maddening because they are in essence ephemeral; they come and they go. Our recent research, however, indicates there is a fundamental cycle parameter that leads us to the correct trading strategy for any current market mode. To find out more, we must start by defining two possible market modes, the trend mode and the cycle mode. In the trend mode, the correct ...
Optimum Predictive Filters by John F. Ehlers
ARTICLE SYNOPSIS ...V13:06: (247-251):Optimum Predictive Filters by John F. Ehlers The optimum predictive filter is the difference between a technical indicator, such as the relative strength indicator or stochastics, and its exponential moving average. Here, we describe it, how to generate it, and how it can be used. It cannot be used in all market conditions - but carefully observing when it can be used can make it a valuable weapon in your technical arsenal. Technical analysis is reactive to market activity. The indicators we develop are largely generated to note the expected price direction. The predictiv...
The Bandpass Indicator by John F. Ehlers
ARTICLE SYNOPSIS ...The Bandpass Indicator by John F. Ehlers Here's an indicator that can be adjusted to be a leading indicator of market reversals based on the cycles in the price data, presented by a longtime S&C contributor. The bandpass indicator is an oscillator-type indicator. It makes full use of the digital computational power of your computer and therefore is superior to conventional oscillators such as the relative strength index (RSI) or the stochastic indicator when the market is in a cycle mode. If you were to stop and think about what an oscillator does, you would conclude that it performs two fu...
Creating Indicators With Physics by John F. Ehlers
ARTICLE SYNOPSIS ...Creating Indicators With Physics by John F. Ehlers Do we limit words or do words limit us? As Stocks & Commodities contributor John Ehlers opines, we can't really describe market activity with terms now used in the technical trading field. He suggests a new approach to looking at the market, using as analogy the physical world and as a result, a way to develop sophisticated new indicators. Every discipline has its jargon. Technical trading is no different. If you doubt that we use jargon, look up the standard definition of ""stochastic"" or ""momentum"" in a dictionary. These definitions ha...
Cycle Analysis And Intraday Trading by John F. Ehlers
ARTICLE SYNOPSIS ...Cycle Analysis And Intraday Trading by John F. Ehlers Veteran S TOCKS & COMMODITIES contributor John Ehlers explains how to make use of cycles analysis in intraday trading, heretofore a rarity. Take a look. Intraday traders have long had most of the technical analysis tools available to end of day traders--with one major exception: cycle analysis. Previously, cycle analysis has been difficult to incorporate into intraday trading because manipulating data files distracted from the business of trading. Now that situation has changed, and finally, cycle analysis can effectively be incorporated in...
Optimum Detrending by John F. Ehlers
ARTICLE SYNOPSIS ...Optimum Detrending by John F. Ehlers Look at any price chart, and you'll find that markets move up and down even while in a trend . Removing the trend can help identify short-term turning points. Frequent STOCKS & COMMODITIES contributor John Ehlers presents different techniques for detrending prices and his optimized detrending method as well. We want to detrend data because we want to remove the longer-term variations so short term turning points are easier to discern, enabling us to better pinpoint the best entry and exit points for short-term trades. Since the goal of detrending is separ...
1991 Cycles by John F. Ehlers
ARTICLE SYNOPSIS ...1991 Cycles by John F. Ehlers If you've always suspected that contracts have definite personalities, you would have your suspicions confirmed this way. Here's an overview of various cycles that appeared in some futures markets during 1991, the way only John Ehlers could explain it. In years past I have reported on the cyclic character of various commodity contracts, concluding that tradeable cycles were present from 15% to 30% of the time and that some contracts tend to have definite cyclic personalities.These conclusions were reached by making spectral estimates on a daily basis and then ga...
The MACD Indicator Revisited by John F. Ehlers
ARTICLE SYNOPSIS ...The MACD Indicator Revisited by John F. Ehlers The moving average convergence-divergence (or MACD, as it is familiarly known), one of the more popular technical indicators, was invented by technician Gerald Appel to trade the 26-week and 13-week cycles of the stock market. Commodity traders often use daily data with MACD but still use 26-period and 13-period exponential moving averages (EMA) in the analysis. The implication is that there are 26- and 13-day cycles in commodity markets. Beliefs such as this (for example, that only a 14-day relative strength index is correct) incite my curiosity...
Computing Cyclic Entries by John F. Ehlers
ARTICLE SYNOPSIS ...Computing Cyclic Entries by John F. Ehlers Knowing how to compute entry points for your trades exactly at price crests and valleys when the market is in the cyclic mode can be advantageous. In fact, the procedure can be adjusted to anticipate price extremes so you can make your entry precisely at the extreme. Alternatively, the procedure can also be adjusted to delay the signals slightly as insurance against whipsaws. The market has several identifiable modes, among which are trends, seasonals, pure randomness and short-term cycles. The procedure I am proposing is intended for use only when ...
Using A Constant False Alarm Rate In Trading by John Ehlers
ARTICLE SYNOPSIS ...Using A Constant False Alarm Rate In Trading by John Ehlers Modern information theory has existed for the last half century or so. This theory has been responsible for man significant scientific advances, including recovery of photograph taken in deep space, pinpoint accuracy of missile guidance and speech synthesis. With such a track record, why couldn't technical traders apply some principles of information theory to trading methodology? Let's examine a trading decision method using some of information theory's fundamental concepts. First of all, trading involves value judgments. One examp...
Early Trend Identification by John F. Ehlers
ARTICLE SYNOPSIS ...Early Trend Identification by John F. Ehlers Impressive profits can be accumulated just by staying with a position during a trend. We would all be millionaires if only we could identify the trend early in its onset. While the trends are obvious in retrospect, it's another matter altogether to identify the trend in the heat of battle. Not only that, there may not be a trend at all at the time we expect one. If we make a reasonable mathematical model of the market we can examine it parametrically. The conclusions we draw from this model can help us establish our entry points and strategies for...
Trading threshold by John Ehlers
ARTICLE SYNOPSIS ...Trading threshold by John Ehlers In radar, signal-to-noise ratio is used to measure the quality of target detection. In trading, this simple concept can be used to hit our profit targets better. We can improve our trading profitability if trading decisions are deferred until the signal-to-noise ratio is high. The charts can be viewed as noisy channels in which the daily range and very short-term day-to-day variations are the ""noise."" The longer-term variations mark the channel envelope. The trader's profitability can be enhanced if he waits for conditions in which the peak-to-peak variatio...
1989 cycles by John F. Ehlers
ARTICLE SYNOPSIS ...1989 cycles by John F. Ehlers Cycle activity in 1989 was substantially higher than in 1988, and some role reversals in cycle personalities appear to have occurred relative to the previous year. To measure and examine 1989 cycle activity, I used 12 perpetual futures contracts as data for the cycle measurements. These 12 contracts were continuations of the same perpetual contracts used for comparisons to 1988 cycle performance. The short-term cycles were measured using the MESA computer program. Valid cycles are reported when the ""cycle content"" (signal-to-noise ratio) exceeds a 6 deciBel (dB...
Profit mapping by John Ehlers
ARTICLE SYNOPSIS ...Profit mapping by John Ehlers Optimization has been attacked by many technicians -- and rightfully so -- because peaking profit is virtually the same as curve fitting to back data. Used in this fashion, optimization can produce startling track records and still be useless for future trading. Market characteristics do change, however, and technical traders need a tool to help them adjust their preferred techniques to the changing market to improve profitability. Calculating the profit at any combination of parameters and making a three-dimensional map of the result is such a tool. Common techni...
Leading indicators with momentum by John Ehlers
ARTICLE SYNOPSIS ...Leading indicators with momentum by John Ehlers Newcomers to technical trading are often confused by terminology. Oscillators don't oscillate and stochastics have nothing to do with random variables. Neither does momentum describe the force required to bring a moving body to rest. In the simplest case, momentum is just the difference between two time-related variables. I have found that, when combined with moving averages, momentum can produce some useful indicators. Because momentum measures the difference of two elements in time, we can consider it a measure of the rate of change. More spe...
Setting stops: A new approach by John Ehlers
ARTICLE SYNOPSIS ...Setting stops -- a new approach by John Ehlers The cliche in golf is ""drive for show, but putt for dough."" The analogy in technical trading is that the ability to pick entry points is highly focused, but scant attention is paid to how to exit a trade. This is unfortunate, because skillfully selected exit points can often make a large difference between overall profit and loss. There are, of course, several exit strategies in common usage. One is to exit with a predefined profit or loss. Another is J. Welles Wilder's parabolic stop-and-reverse or SAR (see related article in this issue). I us...
Moving averages and smoothing filters by John Ehlers
ARTICLE SYNOPSIS ...Moving averages and smoothing filters by John Ehlers Moving averages are perhaps the single most widely used technical trading tool. While averages are important tools, let's face it--we don't need computers to calculate them. Traders were using moving averages long before simple calculators were commonly available. Traders simply computed the averages by hand. Since we have the awesome power of sophisticated computers now at our fingertips, it's logical to imagine that we can harness this power to create a better smoothing filter than the averages we now use. I'll show that may not be so. Th...
Cyclic personalities by John Ehlers
ARTICLE SYNOPSIS ...Cyclic personalities by John Ehlers Are there basic differences in the cyclic behavior of various commodities? Although theory predicts short-term cycles will come and go, there is no theory predicting different cyclic ""personalities"" for different commodities. My experience has been that cyclic trading is successful for some commodities but not for others. My curiosity about the cyclic behavior of different commodities was aroused during the development of a Maximum Entry Spectral Analysis program (MESA) that provided backtesting. Using the program, I measured the cycles of 12 commodities ...
Moving averages Part 1 by John Ehlers
ARTICLE SYNOPSIS ...Moving averages Part 1 by John Ehlers Averages have long been recognized as the best estimator of a random variable. Traders use moving averages as trading signals or as components of trading systems, but the moving average characteristics are seldom described for them. This is the first of a two-part article on moving averages to help promote a wider understanding. I'll explore some interesting characteristics of several kinds of moving averages and compare them in this article. In part 2, these characteristics will be applied to create a new kind of leading indicator entry system. I modestl...
Moving averages Part 2 Ehlers Leading Indicator (ELI) by John Ehlers
ARTICLE SYNOPSIS ...Moving averages Part 2 Ehlers Leading Indicator (ELI) by John Ehlers Most technical indicators use a moving average of some kind, and this usually dooms the indicator to lag price. Some indicators use momentum, or rate of change, to generate a leading function. However, this is similar to taking the derivative of a continuous function, and it results in a very noisy signal. The noise is usually reduced by smoothing or averaging. This averaging delays the indicator so that, at best, it runs even with price, without lag or lead. I have developed a new indicator that provides leading signals wh...
How to use Maximum Entropy by John F. Ehlers
ARTICLE SYNOPSIS ...How to use Maximum Entropy by John F. Ehlers MESA is an acronym for Maximum Entropy Spectrum Analysis, a forecasting method that filters the ""noise"" from time series data and can uncover useful cycles. The advantages of the maximum entropy method over Fourier analysis is that high-resolution identification of cycles is possible using an extremely short database. This is important for short-term trading because cycles can fade or change before they are recognized by more conventional approaches. Maximum entropy also is not subject to the windowing or end-effect distortions that Fourier trans...
A complete computer trading program part 3 by John F. Ehlers
ARTICLE SYNOPSIS ...A complete computer trading program part 3 by John F. Ehlers This is the third of four articles that give a description and BASIC computer program listing enabling you to perform technical analysis on your Apple ][ computer. In the first two installments of this series, we started with a data read program and added a plotting program for the high, low and close of prices. This article will add to that program, enabling you to plot and superimpose moving averages and the Parabolic system over the price history. Adding Listing I to your current plotting program is very easy. Simply LOAD the p...
A complete computer trading program (part 1) by John F. Ehlers
ARTICLE SYNOPSIS ...A complete computer trading program (part 1) by John F. Ehlers This is the first of four articles that give a description and computer listing, enabling you to perform technical analysis with your computer. In the second article I will cover the basics of reading data from a standard format and plotting price history on a graph. The third article will allow you to selectively plot moving averages and J. Welles Wilder's Parabolic System over the price history. The fourth and concluding article will give the computer listings to calculate Commodity Channel Index (CCI), Directional Trend Indicat...
A complete computer trading program Part 4 by John F. Ehlers
ARTICLE SYNOPSIS ...A complete computer trading program Part 4 by John F. Ehlers This is the conclusion of four articles that give a description and listing of an AppletÒ ][ BASIC computer program, enabling you to perform technical analysis on your computer with 48K of memory and one disk drive. This article adds the Commodity Channel Index, Directional Trend Indicator and Relative Strength Index to the graphical representations of price, moving averages and the Parabolic system....
A complete computer trading program part 2 by John F. Ehlers
ARTICLE SYNOPSIS ...A complete computer trading program part 2 by John F. Ehlers This program works with the standard CompuTrac or CSI (Commodity Systems, Inc.) disk data reading format (Table 1). The fundamental idea of this program is to take a 40-character string record for each day's data and break it down into eight columns. You can consider each day's entry as a column. The end result is a matrix that measures eight rows high by ""N"" columns long. The first row is the day of the week and date as NYYMMDD for the year, month, and day. Thereafter, the rows are: Open, High, Low, Close, Open Interest, Volume, ...
Cycle Analysis: A comparison of the Fourier and Maximum Entropy methods by John F. Ehler
ARTICLE SYNOPSIS ...Cycle Analysis: A comparison of the Fourier and Maximum Entropy methods by John F. Ehler The motivation for reducing price history to a mathematical expression is clear. If we can describe the prices mathematically, we have the means to extend the equation into the future to predict what the prices will be. Cycle analysis is particularly attractive because, if a simple cycle is present and will extend into the future, all we have to do is to wait until the prices reach a valley to buy and then wait again for the price to reach the crest of a cycle before we sell....
Optimizing directional movement with cycles by John F. Ehlers
ARTICLE SYNOPSIS ...Optimizing directional movement with cycles by John F. Ehlers Directional Movement, an approach which weighs the daily difference between highs and the difference between lows, can be optimized by applying cycle concepts. Ehlers explains the process and includes a BASIC computer program which features the optimized Directional Trend Indicator. Directional Movement is a technical analysis approach that weighs the daily difference between highs and the difference between lows. The principle of this approach is that the larger difference will influence the directional movement of the price. Wel...
Optimizing RSI with cycles by John F. Ehlers
ARTICLE SYNOPSIS ...Optimizing RSI with cycles by John F. Ehlers A look at Wilder's Relative Strength Index oscillator and an optimization using cycles. Also included is a BASIC computer program which follows the author's optimization processes. As an engineer I have often been puzzled by some of the terms used by investors. One example is the use of ""oscillators"" to form trading signals. I have always thought that an oscillator was a device that generated cycles. This caused my initial attraction to such indicators. I quickly learned that a trading oscillator had nothing to do with cycles. Used in the tradi...
Trading Channels
ARTICLE SYNOPSIS ...Introduction You don't have to examine price charts very long before you can picture the prices varying around a trendline in a trading channel, having the trendline reverse, and the trading within the channel begin all over again. We will describe two methods that can help visualize the channels and identify the price turns that comprise the channel edges. The first of these is the Commodity Channel Index (CCI) that measures the price excursions from the mean as a statistical variation. The second method brackets the price trading channel that is centered on a best-fitting straight...
Understanding cycles by John F. Ehlers
ARTICLE SYNOPSIS ...Understanding cycles by John F. Ehlers Introduction The first thing we must recognize is that cycle analysis doesn't always work for profitable investment strategy. This is no great surprise, because cycles must be present in the data history for any analysis of them to be valid. Also, to be useful, we must assume that the cycles in the history will extend into the future so that a prediction can be made. This is sometimes impossible because of fundamental issues. For example, a freeze in Florida will probably swamp any technical factors on orange juice futures. Even within these constraints...
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