TRADING TECHNIQUES

Examining The Big Picture

Setting Strategies With SwamiCharts Tips Logo

by John F. Ehlers and Ric Way

Once you have identified a cyclical movement, you may think the most difficult part is over. Unfortunately, not all cycles are tradable. Here’s one indicator that can tell you the best time to use a swing wave as an effective trading signal.

For the most part, the rendering of technical indicators has not changed since the days of pencil & paper charting. The powers of modern computers have made this unnecessary and allowed for deeper insight into market activity. In our last article, we introduced SwamiCharts as a new and intuitive way to view indicators in context of all lookback periods. SwamiCharts accomplished this by using the vertical scale as the indicator lookback period and painting the indicator value at each lookback period as a color.

In this article, we will show you how to see all the waves in the data, which leads to some startling conclusions. However, the existence of cycles does not necessarily mean they are all tradable; for example, the cyclic swings can be overwhelmed by the slope of a trend. We will show you how to compute this and how to use the result as a decision to follow the trend or to swing trade.

SwamiCharts swing wave
If you know the correct cycle period, the best way to isolate the wave is to use a bandpass filter. We decided to use the EasyLanguage code to compute the bandpass filter in corona charts to measure the dominant cycle and one of the filters in the Swiss army knife indicator. For your convenience, a two-pole bandpass filter EasyLanguage code fragment is shown in the first sidebar, “EasyLanguage Code Fragment To Compute A Bandpass Filter.” The bandpass filter code is displayed in the second sidebar, “Bandpass Filter Code In EasyLanguage.” In the code, delta = 0.1 means the filter has a +/-10% passband about the tuned cycle period.

In the SwamiCharts swing wave, we use an array of bandpass filters over the full range of cycle periods of interest. The swing wave vertical scale is the cycle period. Cycle valleys are painted blue, while cycle peaks are painted orange.

Image 1

FIGURE 1: SWAMICHARTS SWING WAVE DISPLAYS ALL MARKET WAVES. This gives you an idea of how complex market waves can be, making it difficult to trade with cycles. The monthly waves are at the bottom of the indicator and the quarterly waves are at the top of the indicator.

…Continued in the April issue of Technical Analysis of Stocks & Commodities

Excerpted from an article originally published in the April 2012 issue of Technical Analysis of Stocks & Commodities magazine. All rights reserved. © Copyright 2012, Technical Analysis, Inc.

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