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This month, this Contributing Writer looks at using lunar cycles as the basis of a trading system.
In my previous two articles, I focused on cycles -- rhythmic oscillations that occur with a certain periodicity or frequency. Initially, I explored seasonal cycles, which I defined as recurrent phenomena consistently connected to the calendar, and found that fairly good predictions could be made on the basis of historical market behaviors linked to specific dates as well as times of the year. Then I attempted to find cycles that, unlike seasonal influences, were not overtly related to any other kind of phenomena but were merely recurrent rhythms or oscillations in the market; while performance across samples and markets was somewhat mixed, the filter bank method I developed for testing this hypothesis appeared to exhibit some potential as the basis for an effective trading strategy based on cycles.
This time, I will return to analyzing the cyclic market behavior determined by underlying forces. Specifically, I will examine the relationship between market behavior and lunar rhythms. As before, my goal is to find useful knowledge to cast into rule templates and add to the template pool from which to create optimal combinations and parameters for successful trading systems.
LEGITIMACY OR LUNACY?
I will not a priori dismiss the possibility that the market may be influenced by lunar forces simply because of the pervasive opinion that astrology (defined in Webster's New Collegiate Dictionary as "the divination of the supposed influences of the stars and planets on human affairs and terrestrial events by their positions and aspects") is ludicrous. Such opinions are often based on the lack of knowledge. But what do we already know about astrology and/or lunar influences?
Is there any correlation between the phases of the moon and the behavior of the market?
The lunar cycle I will examine concerns the phases of the moon -- full moon, first quarter, last quarter and new moon. I will try to ascertain whether there is any kind of recurrent market rhythm where the phase of the moon is predictive of whether the market is bottoming or topping. For example, does a given market form bottoms at the time of the full moon, or perhaps five days before the full moon, or at the new moon? Since the lunar cycle may affect different markets in different ways, I will examine several markets, using standard end-of-day data.
A disk of the code published herein is available from Katz for $5 to cover shipping and handling. Anyone interested should call Scientific Consultant Services after 4:00 p.m. Est.