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All,
I've been thinking about developing a binary wave and a binary
wave system test based on price and volume patterns only to supplement
my indicator binary wave composite. I don't want to use any
indicators except price and volume. I'm hoping to use all the old
sayings such as higher highs and higher lows are bullish, breakouts
and big moves on large volume, etc. I'd like to develop this binary
wave and test with help from everyone on the list who is interested.
Maybe we can all learn something and come up with a useful system.
To develop the binary wave and test sensitivity of any proposed
component, I'd like to use a simple zero crossover test. After the
binary wave is developed, we can experiment with ideas to make the
system test more useful. So to start off the system test will be:
Enter Long
Fml("Tema PV Binary Wave") > 0
Enter Short
Fml("Tema PV Binary Wave") < 0
we don't need anything more complicated then this to develop the
binary wave.
The first idea I tried was the old idea that higher highs and
higher lows are bullish and lower lows and lower highs are bearish. I
decided that it made sense to test for short, intermediate, and long
term indications. I've used 21, 55, and 233 days for short,
intermediate, and long term moving averages for years, so that's what
I decided to start with. My first idea for a bullish formula was as
follows:
PVBW01 (Higher Highs & Lows)
If(HHV(L,8) = HHV(L,21),1,0) +
If(HHV(L,21) = HHV(L,55),1,0) +
If(HHV(L,55) = HHV(L,233),1,0) +
If(HHV(H,8) = HHV(H,21),1,0) +
If(HHV(H,21) = HHV(H,55),1,0) +
If(HHV(H,55) = HHV(H,233),1,0)
The idea here is to see if the highest value is achieved in the last
part of the period. If it is, then we can say that the highs and lows
are rising for the period being looked at. Any time the condition is
true, we get a value of 1, anytime it is false, we get a value of 0.
The formula then adds the result so the total will be a whole number
between 0 and 6. I then plotted that formula above several stocks and
tested it with the simple binary wave test and found that it did
perform fairly well.
I then thought about my actual trading and realized that I
generally give more weight to longer term trends. Therefore, I played
with the formula to give more weight to the longer terms and ended up
with the following for thew first component of my PV binary wave:
PVBW01 (Higher Highs and Lows)
If(HHV(L,8) = HHV(L,21),1,0) +
If(HHV(L,21) = HHV(L,55),2,0) +
If(HHV(L,55) = HHV(L,233),3,0) +
If(HHV(H,8) = HHV(H,21),1,0) +
If(HHV(H,21) = HHV(H,55),2,0) +
If(HHV(H,55) = HHV(H,233),3,0)
I then decided to use the mirror image for a bearish formula
PVBW02 (Lower Highs & Lows)
If(LLV(H,8) = LLV(H,21),-1,0) +
If(LLV(H,21) = LLV(H,55),-2,0) +
If(LLV(H,55) = LLV(H,233),-3,0) +
If(LLV(L,8) = LLV(L,21),-1,0) +
If(LLV(L,21) = LLV(L,55),-2,0) +
If(LLV(L,55) = LLV(L,233),-3,0)
Of course we need to add all the components together to get a binary
wave so my first attempt at a PV binary wave formula was as follows:
PVBW Add
Fml("PVBW01") + Fml("PVBW02")
My next though was how to use an up move on high volume as
bullish, a down move on high volume as bearish. I finally came up
with:
PVBW03 (High V Up Move)
If(Mov(V,3,S) > 1.13*Mov(V,21,S),1,0) *
If(C > Ref(H,-1),3,0)
This formula will return a zero if the volume is less then 1.13 times
the 21 day simple moving average or if the close is less then
yesterday's high. It returns a plus 3 (bullish) if the volume is more
then 1.13 times the 21 day moving average and the close is higher then
yesterday's high. I use the mirror image for the bearish condition:
PVBW04 (High V Down Move)
If(Mov(V,2,S) > 1.13*Mov(V,21,S),1,0) *
If(C < Ref(L,-1),-3,0)
The Binary Wave formula now becomes:
PVBW Add
Fml("PVBW01") + Fml("PVBW02") + Fml("PVBW03") + Fml("PVBW04")
My final thought was to give quite a bit of bullish weight for
new high volume 233 day highs or bearish weight for high volume 233
day lows. The formulas doing that are pretty straight forward and
are:
PVBW05 (New 233 Day High)
((If(Mov(V,2,S) > 1.13*Mov(V,21,S),1,0)) *
If((H = HHV(H,233)),7,0))
PVBW06 (New 233 Day Low)
((If(Mov(V,2,S) > 1.13*Mov(V,21,S),1,0)) *
If((L = LLV(L,233)),-7,0))
The Binary Wave formula now becomes:
PVBW Add
Fml("PVBW01") + Fml("PVBW02") + Fml("PVBW03") + Fml("PVBW04")
+ Fml("PVBW05") + Fml("PVBW06")
Finally, I'd like to smooth the binary wave, so I'll use the Tema
function for that and my final test binary wave is:
Tema PV Binary Wave
Tema(Fml("PVBW Add"),34)
That's as far as I've gotten. I'm attaching a MetaStock V6.5
self extracting import file with the formulas and test. Just double
click on the file and tell it to unzip to a blank subdirectory or
floppy. The
instructions on importing are on page 215 of your manual. I'd
appreciate it if you would test the wave against several of your
stocks and make suggestions on changing any of the formulas I
presented. Also, I'd like your ideas for additional components.
Please restrict those ideas to price and volume relationships only.
Thanks!
Jim
Attachment Converted: "c:\eudora\attach\MSBWTest.exe"
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