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CYCLES
Cycles In Time
And Money
Wouldn’t you like to be able to identify top and ■ Outline a baseline trading system to test the
bottom extremes and get signals to open new posi- performance of the UCI in example applica-
tions or close current ones? This may help. tions.
■ Compare the real-time UCI to best-estimate
centered versions to determine the effect of
Volatility (Sigom %)
Minor cycle index
(period 25 bars)
dynamic volatility sigma
(σ0) calculated as the stan-
dard deviation of minor
+12.7% +5.6%
plus subminor price os- (6) (8)
cillations with respect to a +22.2%
minor-term centered mov- VeriSign (VRSN) (4)
ing average. Candlestick chart
The UCI minor cycle (Daily bars)
+12.8% (7)
limits are ±50% (σ0). A (2) (5) +1.2% Price
doubling of these levels, -8.7% semilog
±100% (σ0), corresponds scale
Longs +18.4%
to two-sigma (95%) price Trend phase lines Shorts -17.9%
(3) (interval 12 bars)
action confidence limits. -10.4% Longs and shorts +0.5%
The centered average in- Plus continuations +35.4%
(1)
troduces half-cycle mi-
nor-term lag ∆t = TM / 2 in 2003
(10)
(8) +6.5%
(4) -3.6%
-5.4% Longs +13.2%
(6)
+7.7% Shorts +17.1%
(2) Trend phase lines Longs and shorts +30.3%
+11.9% (interval 12 bars) Plus continuations +43.9%
2003
FIGURE 2: OSCILLATING PRICE ACTION. Here, VRSN transitions to a subsequent nine months of neutral oscillations with two
secondary cycles.
all but about five of 100 FIGURE 4: OSCILLATORS. Classic oscillators such as the relative strength index (RSI) and the stochastics oscillator (STO), when
price bars. Centered chan- equivalently scaled and normalized, are essentially identical to the UCI.
nel lines track trends very
closely and would amount to a standalone money machine if highest high with respect to the lowest low across the
available in real time. Real-time channel lines show the un- scaling interval. The figure includes STO limit lines at
avoidable effects of lag. traditional levels of 20% and 80%. Note that with respect to
amplitude, phase, and minor details the three oscillators are
OTHER OSCILLATORS virtually identical. A bit of algebraic manipulation verifies
Figure 4 compares the minor term UCI as a normalized this similarity of classic oscillators.
MACD to two classic, similarly scaled oscillator-based indi- The bottom window in Figure 4 includes minor (25-bar)
cators: the relative strength index (RSI) and the stochastic and subminor-term (12-bar) exponential moving averages
oscillator (STO). (EMAs). Note that crossing points and separation extremes
The RSI is normalized from zero percent to 100% of the are very close to UCI crossing and extreme points. This is
difference between up-bar and down-bar momentum mea- because the UCI is derived from the difference of exponential
sured as price changes across the scaling interval. The averages. Signals based on moving average crossing action
figure includes RSI limit lines at the 30% and 70% levels. are generally equivalent to oscillator-based signals.
The STO is normalized from zero percent to 100% of the
IS THE UCI
UNIVERSAL?
Volatility (Sigom %) Figure 5 is a five-minute
intraday chart of the No-
Minor cycle index
(period 25 bars) vember 4, 2003, price
bar denoted on the VRSN
daily chart in Figure 2.
Longs +0.88% With labels and numer-
(1) Shorts +2.68% Price als removed, it would be
VeriSign (VRSN) -0.08%
(3) Longs and shorts +3.37% semilog very difficult to distin-
Candlestick chart scale
(5-minute bars) Plus continuations +2.59% guish the general char-
+1.55% acteristics of the five-
(7)
minute chart from those
-0.73% of the parent daily chart.
(2) (5)
-0.60% Long positions pro-
duce a positive gain of
Trend phase lines +0.88% and short posi-
(interval 12 bars) (8) tions, a gain of +2.68%
+2.59% (4)
(6) +0.69% for a combined return of
-0.67%
+3.37%. In this example,
2003 the inclusion of continu-
FIGURE 5: INTRADAY STOCK CHART. Note that this five-minute chart of VRSN has the same general characteristics as its parent daily chart. ation signals reduces the
Volatility (Sigom %)
Minor cycle index
(period 25 bars)
composite gain to a very
acceptable +2.59%. This +1.5%
is because price action (8)
+11.6% +6.8%
with longs in place hap- (4) (6)
pens to trigger three sig- Boeing (BA)
nificant stop-loss signals. Candlestick chart
In addition, the forced (Daily bars)
Price
close 10 minutes before semilog
the close yielded a gain. -4.0% scale
(2) (7)
Other examples show that
-2.8%
intraday systems usually
(5) Longs +2.8%
do better with always-in +4.6% Shorts +1.8%
Trend phase lines
two-way trades. As in the (interval 12 bars) Longs and shorts +4.6%
case of daily trading, in- (1)
(3) Plus continuations +14.0%
-3.7%
cluding continuations
appears to be a beneficial 2003
trading tactic. FIGURE 6: DAILY STOCK CHART. A template based on this format may be applied to any daily or intraday security with compatible
In the chart of Boeing price data.
(BA) in Figure 6 from
July to November 2003, the price chart is similar to that of continuations improves the net gain to +30.7%. The longer-term
VRSN over the same period. In this case, long and short investor, even when correct about an extended upward trend,
positions produce modest gains of +2.8% and +1.8%, respec- does significantly better by incorporating money management.
tively, with a combined yield of +4.6% compared to the +25%
maximum upside excursion. Including continuations improves CONCLUSIONS
the yield to a more generous +14%. There is no need to experiment with a variety of cycle indica-
The weekly chart of the Vanguard Star Fund (VGSTX) in tors, scale factors, and time intervals. You can use any oscilla-
Figure 7 has 100 bars of primary-term trending lasting three tor-based indicator that you prefer scaled to a personal time
years with four minor cycles of about 25 bars each. For a frame and normalized by a statistically credible measure of
mutual fund, you may be limited to long positions with a limit current volatility. It may be better to focus on fewer (more
of three or four round-trips per year. inclusive) price bars as opposed to more (less inclusive) bars
The maximum possible gain is +40%. The price action across your favored trading intervals.
triggers two longs but is sufficiently oscillatory to close both The analysis presented shows that trading systems based
positions prematurely with a net gain of +20.6%. Including entirely on cycle indicators may be profitable, but more as a
matter of trading tac-
tics and money man-
agement than choice of
Volatility (Sigom %)
signal rules. This is par-
ticularly true with re-
spect to the detailed cri-
Minor cycle index teria and rules required
(period 25 bars) +2.4% for a sequence of trades
+8.2% (8) as opposed to simple
(6)
+7.7% in-and-out rules, which
Vanguard Star Fund (4)
may serve for indi-
(VGSTX)
vidual trades.
+12.4%
(2) (7)
Price Stuart Belknap is an af-
semilog
scale filiate of the Market
Technicians Associa-
(3) (5) tion, a systems engineer,
Longs +20.6% and a technical analyst.
Trend phase lines Plus continuations +30.7%
(interval 12 bars)
(1) 1997 1998 1999
FIGURE 7: WEEKLY MUTUAL FUND. This format also applies to any weekly chart.
SUGGESTED READING
Achelis, Steven B. [2000]. Technical Analysis From A To Z,
McGraw-Hill.
Belknap, Stuart [2003]. “Time And Money Charts,” Technical
Analysis of STOCKS & COMMODITIES, Volume 21: May.
Chande, Tushar S., and Stanley Kroll [1994]. The New Tech-
nical Trader, John Wiley & Sons.
MetaStock Professional User Manual, version 7.0/8.0, Equis
International, www.equis.com.
See our Traders’ Tips section for program code implementing Stuart
Belknap’s technique.
†See Traders’ Glossary for definition
S&C