Cycle Analytics For Traders Advanced Technical Trading Concepts By John F Ehlers.pdf

Halving their end coefficients also guarantees a double zero in their transfer response at the Nyquist frequency. A smoothing filter should have sufficient selectivity to reduce aliasing noise below the systemic noise level. The digital Butterworth filter approximations included numerators whose coefficients were and for two- and three-pole configurations, respectively. However, for applications to trading, I noted that the primary contribution of the numerator terms was to increase the filter lag. So I created modified versions simply by deleting all but the constant term in the numerator of the Butterworth transfer response. Moving averages are discussed in this chapter simply because they are ubiquitous in technical analysis.

  • “For the self-directed trader with a mathematical bent, this is the ultimate work. I especially enjoyed the descriptions of trading strategies as they apply to the various analytics.”
  • A wider pass-band filter adapts more quickly to changes in the input data.
  • For example, a nonrecursive filter of degree six will have a three-bar delay.
  • As evidence of my warped sense of humor, each chapter starts with a “Tom Swifty” pun that encapsulates the entire content of the chapter and I hope serves as an anchor for the reader’s memory.
  • This transfer response equation shows the decycler to be a one-pole filter because the denominator contains only a first-order polynomial.
  • This version of the Sine Wave is “powered by” the Hilbert Transform indicator and looks like it might actually be useful, unlike other versions I have seen.

In this case, the higher frequencies are passed, and the lower frequencies are severely attenuated by the filter. Since trends can be viewed as pieces of a very long cycle, a high-pass filter is basically a detrender because the low-trend frequencies are rejected in its transfer response. The interesting thing about this equation is that we have now written the transfer response as a generalized algebraic polynomial. How to use transforms to improve the display and interpretation of indicators. Several different methods of estimating market spectra and sifting out the dominant cycle, with the autocorrelation periodogram being the preferred method. These include the SuperSmoother, roofing filter, even better sinewave, decycler, and Hilbert Transform Indicator. Hilbert Transform 2 is plotted in the bottom panel of the chart shown below.

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In this case, the high-pass filter is tuned to the high-frequency side critical frequency of the band-pass filter. Doing this creates a leading waveform resembling the band-pass filter output, but still has a phase lead characteristic.

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The objective of smoothing filters in trading is to get the highest degree of smoothing possible within the constraint of inducing the least amount of lag. The purpose of this chapter is to develop those kinds of filters for traders.

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The expectation of obtaining more smoothing by increasing the length of the SMA leads us to examine a six-element nonrecursive filter whose elements are / 6. Increasing the degree of the polynomial introduced another zero in the transfer response polynomial so that two-, three-, and five-bar cycle periods are completely eliminated at the output. However, attenuation between the rejection points is not changed with respect to the lobe number, and is only slightly increased from lobe to lobe. The critical period of this filter is increased compared to the four-element SMA to be at a 13.7-bar cycle period. The critical period of a filter output is the frequency at which the output power of the filter is half the power of the input wave at that frequency.

Low-pass filters are smoothers because they attenuate the high-frequency components of the input data. Nonrecursive filters having coefficients symmetrical about the center of the filter will have a delay of half the degree of the transfer response polynomial at all frequencies. Filter transfer response can be viewed in the time domain and the frequency domain with equal validity. All the common filters useful for traders have a transfer response that can be written as a ratio of two polynomials. However, it is much more efficient to create the band-pass filter response simply by selecting the proper coefficients in Equation 1-3. In this case, the roots of the polynomial are called the poles of the transfer response because a zero in the denominator of the transfer response causes the transfer response to go to infinity at that point.

EasyLanguage computer code is used to calculate and display the indicators. From my viewpoint, EasyLanguage is just a dialect of Pascal with key words for trading. The horizontal axis is plotted in terms of frequency rather than the cycle period that is most familiar to traders. Frequency and period have a reciprocal relationship, so a frequency of 0.25 cycles per bar corresponds to a four-bar period. The vertical axis is the amplitude of the output relative to the amplitude of the input data in decibels. Figure 1.1 shows that there are zeros in the filter transfer response in the frequency domain as well as in the time domain. Most important, Cycle Analytics for Traders will allow traders to think of their indicators and trading strategies in the frequency domain as well as their motions in the time domain.

Read online and download as many books as you like for personal use. Join over thousands happy readers, and cancel the membership at anytime as you like if not feel satisfied. A perfect square represents an idealized geometry not found in nature. Natural fractals, such as that of a seashore, lack the true regularity of an algorithmic structure but are self-similar in a statistical sense. Thus, in order to determine the fractal dimension of natural shapes, we must average the measured fractal dimension made over different scales. In other words, the logarithmic transform renders the 1/F α power spectrum a straight line whose slope, −α, can be easily estimated. Clearly, for such natural systems, observed by humans, neither arbitrarily small nor arbitrarily large frequencies can be recorded.

There are many better filters for various applications that are described in the following Retail foreign exchange trading chapters. Moving averages have the advantage that they are dirt-simple to compute.

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Equation 1-7 shows that the zero in the transfer response occurs exactly at the Nyquist frequency. We have succeeded in completely canceling out the highest possible frequency in the four-bar SMA. Noise in economic data is usually studied as long-range dependence or long memory. You only need to do an Internet search on “stock market spectral density” to find Retail foreign exchange trading a number of academic papers, both measured and theoretical, regarding the frequency content of the market. A band-pass filter tuned to a period longer than the dominant cycle produces an output that lags the swing in the input data. A band-pass filter tuned to a period shorter than the dominant cycle produces an output that leads the swing in the input data.

An example of the dominant cycle period measurement is shown in Figure 5.12. The theoretical closing prices swing +/− 5 from a central value of 60. In this case, the band-pass filter is tuned to a 20-bar cycle period. In Figure Foreign exchange market 5.2, it is clear that signals whose periods are both less than and greater than a 20-bar cycle are attenuated. It is certainly possible to create a decycler by subtracting a two-pole high-pass filter output from the input data.

“For the self-directed trader with a mathematical bent, this is the ultimate work. I especially enjoyed the descriptions of trading strategies as they apply to the various analytics.” To better cycle analytics for traders understand the theory of diffusion, imagine the way a smoke plume leaves a smokestack. Think about how the smoke rises as comparable to how a trend carries itself through the market.

It rejects a band of frequency components as a notch at the output and passes all other frequency components virtually unattenuated. Since the bandwidth of the deep rejection in the notch is relatively narrow and since the spectrum of market cycles is relatively broad due to systemic noise, the band-stop filter has little application in trading. The lag of all nonrecursive filters having coefficients symmetrical about the center point of the filter is half the degree of the transfer response polynomial. In other words, for a nonrecursive filter having N elements, the lag of that filter will be (N − 1) / 2. Market data contain noise, and removal of noise is the reason for using smoothing filters.

Therefore, filters used for trading best use a relatively small amount of input data and should be not be complex. In this chapter you will find the difference between nonrecursive filters and recursive filters, and combinations of the two, enabling you to select the best filter for each application. In addition, you will find that the responses in the time domain and in the frequency domain are intimately connected. When designing filters for trading, it is beneficial to consider the response in both of these domains. It is important to remember that no filter is predictive—filter responses are computed on the basis of historical data samples.

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In a nutshell, the amplitude of the market data spectrum is not flat, and traders must be sensitive to that fact when employing filters. The decycler and decycler oscillator examples are shown in Figure 4.4, where the cutoff period is 30 bars. In the case of the decycler oscillator, the longer cutoff period is set to be 60 bars. The frequency response of the SuperSmoother filter where the critical period is set to 10 is shown in Figure 3.10. The frequency responses of these filters are shown in Figure 3.7. The frequency responses in Figure 3.7 show that these are clearly superior smoothing filters for trading.

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A band-pass filter can be generated by cascading a low-pass filter and a high-pass filter. However, this approach results in really poor filtering unless a large number of data samples are used to increase the degree of the polynomials. When we do this, the transfer response of a simple pass-band filter is described by Equation 5-1. The coefficients can be weighted symmetrically about the center of the filter. Among the most simple of these is a filter whose coefficients are / 6.

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The phase shift across the bandwidth of the band-pass filter is unavoidable. The phase shift is doubled each time the number of poles is doubled in the transfer response. Therefore, it is important to use the simplest filter possible in trading to minimize phase shift distortion. SMAs are a special case of nonrecursive filters where all the coefficients are equal to unity divided by the number of elements in the filter.

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Nonrecursive filters with coefficients symmetrical about the center point of the filter and having an even number of elements will always have a zero in the transfer response at the Nyquist frequency. It is difficult to use cycle periods shorter that two octaves below the Nyquist frequency. That is, an eight-bar cycle component has a quantization noise level 12 dB below the noise level at the Nyquist frequency. Longer cycle components therefore have a systemic noise level that exceeds the aliasing noise level. Since the degree of the polynomial is one less than the number of elements in the filter, nonrecursive filters having the number of elements as 2, 4, 6, 8, 10, and so on will have this characteristic. Since the lag of nonrecursive filters is half the degree of the filter, these filters will have lags of 0.5, 1.5, 2.5, 3.5, and 4.5 bars, respectively. Filter design not only depends on the amount of smoothing desired, but also on the amount of lag that can be tolerated.