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Michael Arnoldi;
Hurst's 1970 book on the Profit Magic of Stock Transaction Timing (Prentice
Hall) introduced the concept of "valid" trend lines. Valid meant trend
lines that crossed over important cyclic bottoms (under,tops). As an
example; for daily data, he demonstrated a "model" of 80D, 40D, 20D, and 10D
cycles.
You pinpoint cycles from visual inspection of the data. You pace them off by
first and second finger measurements. You draw downward trend lines over
taops of the smaller cycles.
When the trend line passes over the expected place of a major, longer term,
low (40D, 80D, 20W, 40W, 80W), dthen the subsequent breakout above
dastsrendline is a "valid" breakout and may be followed.
There is another aspect to his work, which makes a "system", and that is the
"half-span" moving average. This is simply the MA of 1/2 the period of the
dominant cycle. The "dominant" cycle is the one having the greatest
magnitude, determined via visual inspection/.
Now that we have MS Fourier analysis tsechniques built is as an indicator,
we can analyse price movement for specific cycle lengths. If you believe MS
Fourier is accurate, you will use it to determine your dominant cycle.
There are fine points of sub-dominant cycle analysis that can be included in
this approach; where ,i.e. smaller waves come in threes instead of twos,
etc; but that is not the princicpal thought in defining the valid trendline.
Only when important longer term cyclic lows are expected (and subsequently
made) are trend lines to be drawn, that can be considered valid.
The half-span MA technique is the use of MA's of 1/2 the period of each
identifyable cycle, lagged by half their span. When you see a layered
cascade of these MA's above your valid trend line, you can calculate your
upside price objectives by multiplying distance from low to break of MA by
2; fosr each MA in turn.
A very intriguing system. Only Pardo from Chicago has produced software for
this entire system, but it is older and may no longer be available. You can
use the MS Fourier analysis instead to achieve virtually the same results.
Another use of trendline is one developed by Jeff Borowitz of Trendsetter
(LA, CA); proprietary, and available only for the Mac. It uses an
iterative process to produce trendlines, on the basis that all important
moves result in the breaking of some long trendline. What software does is
produce a set of short,medium, and long term trend lines based on actual
prices, but without using "hindsight". Buy and sells are calculated at most
profitable distance over, or under, trendlines. Results in excellent entry
prices when right.
Trendlining the momentum indicators has also been used successfully by
commodity traders in the Wilder- Patterson millieu to find entry and exit
points.
In addition there are many interesting (but complicated) formulae available
at the Market Research Association website.
Regards,
Mike
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