Cycles In Time And Money

CYCLES

Systems And The Universal Cycle Index

Cycles In Time And Money
by Stuart Belknap, Ph.D.

Wouldn't you like to be able to identify top and bottom extremes and get signals to open new positions or close current ones? This may help.

When was the last time you thought about using cycles to design a trading system? Many trading systems depend on cycle indicators, and in this article I will focus on systems derived from oscillators. These days, there are literally hundreds of oscillator-based cycle indicators, each scalable by one or more parameters. In addition, most toolbox programs provide a simple formula language, which you can use to derive any number of personal variations.
Markets, groups, and individual securities have characteristic behavior that requires just the right indicator for a given time frame and trading bar interval. It is also evident that markets demonstrate both extended trending and flat or trading type price action, each of which may or may not favor one indicator over the other. But is this level of complexity necessary?
The universal cycle index (UCI)
The universal cycle index (UCI) is a standard of reference applicable to any security, time frame, and trading bar interval during either oscillating or trending price action. The MetaStock user formulas are shown in the sidebar on page 35, but here, I will:
Outline a baseline trading system to test the performance of the UCI in example applications.

Compare the real-time UCI to best-estimate centered versions to determine the effect of increased time lag on performance.

Show that the UCI, as our standard of reference, is essentially equivalent to any similarly scaled and normalized oscillator.

Test and compare UCI performance applied to: a volatile common stock with daily price bars; two days of the same stock with five-minute price bars; a less volatile stock with daily bars; and a mutual fund with weekly price bars.

MEASURING CYCLES
The UCI is nothing more than a normalized moving average convergence/divergence (MACD) indicator. I have scaled the index to:
1. Fundamental minor cycle period TM = 25 bars, with minor trend phase interval *t = TM / 2 = 12 bars
2. Secondary cycle period TS = 50 bars with trend phase interval *t = TS / 2 = 25 bars
3. Intermediate cycle period T1 = 100 bars with trend phase interval *t = T1 / 2 = 50 bars
...Continued in the May issue of Technical Analysis of STOCKS & COMMODITIES

Excerpted from an article originally published in the May 2005 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2005, Technical Analysis, Inc.

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