Hi all

In answer to all the questions received (lotsa lurkers on our list eh?), I decided a combined
approach was best. So I amalgamated the questions. Immediately below the formula, there is
a list of them along with my replies, and some additional guff’n’waffle.
Regds
Gerard

// DOW WAVES
/* I thought we’d best name this Indicator in respect to Mr Charles Dow,
who first identified the three trends. Kind regds everyone and good trading.
Gerard Carey - 8th March 2007*/

CA= (CCI(10)+CCI(12)+CCI(14)+CCI(16)+CCI(18))/5;
CB= (CCI(25)+CCI(35)+CCI(45)+CCI(55)+CCI(65))/5;
CC= CCI(6) ;
CD= CCI(200);

Plot( CD,"DOW WAVES Long-Term",6,4) ;

Plot( CB," Medium-term",4) ;
Plot( CB,"",4,2+4096) ;
Plot( CA," Short-term",1,4 );
Plot( CC," Advance Warning",7) ;

// Plot range lines

Plot(0,"",4);
Plot(100,"",39,4096); Plot(-100,"",39,4096);
Plot(200,"",39,4096); Plot(-200,"",39,4096) ;

// Plot entry setup arrows

CondA= CB>0 AND (CA<0 OR Ref(CA,-1)<0) AND CA>Ref(CA,-1) AND Ref(CA,-
1)<Ref(CA,-2) ;
PlotShapes( shapeSmallUpTriangle*CondA, 27,L,-150) ;

CondB= CB<-0 AND (CA>0 OR Ref(CA,-1)>0) AND CA<Ref(CA,-1) AND Ref(CA,-

1)>Ref(CA,-2) ;
PlotShapes( shapeSmallDownTriangle*CondB, 4,H,150);

Now the Q&A Session

How did you figure out what specific momentum indicator to use?
I already knew it didn’t matter too much which one I decided to use. RSI-Stochos-ROC-
Williams%R-CCI-Whatever. They all measure the same thing, only in slightly different ways.
I’ll prove it to you later.
I started with the CCI as I just like the way it cycles above and below zero. CCI’s Momentum
Equilibrium is centered at zero. Comfy on the eyes. And its scaling - nice clean precise
generous levels, to use in determining entry and exit setups.

Where did you start?

Daydreaming - about what sort of chart Charles Dow was looking at.
We know he just added the closing prices of all the stocks in his index together and used that
as his EOD close. I suppose he updated a hand drawn chart every day so it probly looked
similar to a line chart with dots.
Next I wondered what ‘his’ market would have been like. A bit of net sleuthing found articles
that suggested that he wrote this editorial in a market that had been generally bullish for 10 or
so years. I couldn’t confirm this with any charts myself (although I know the data is out there
somewhere) so I just took it as fact. I mean how could he have noticed long, med and short-
term uptrends if he didn’t have a bullish long-term chart?
If you didn’t have his data how could you proceed?
Just found an index whose chart included the display of a long term uptrend, in which I could
see each of the three trends. That’s what Dow did. Only I had more choice than he.

How did you ascertain the correct parameters for each trend?
That’s the trick (and the longwinded) part. I got lucky.
To identify trend changes I had previously, like most folks, used trendlines. Trouble is, at the
right hand edge of the chart we often have to adjust them up and down as the market
proceeds on it merry way. A lot of the time the rotten market just doesn’t seem to care about
our trendlines. It’s only with HINDSIGHT that we can position them correctly.

Ah ha! But that’s just what I HAD with the index I had selected.
So, with hindsight, I drew a long-term tendline under the price line. It got touched, but not
penetrated by price, twice along the way. Sign of a good trendline right? Then I checked the
ADX of the index. Most of the time it was over 20/25. So I’d happened to pick a good, strong,
long-term trend.

Then, in AmiBroker, under the index chart with the LT trendline, I slapped a CCI on a chart
pane. I dialled the parameter up and down til I found a level where the CCI line got real close
to, but did not penetrate zero, at the same time as price touched but did not penetrate the
trendline on the chart above.

I looked along towards the end of the trend, where price broke below my LT trendline
signalling the end of the LT uptrend.
The CCI line crossed down thru zero at almost the very same time.
I was on the right track.
The parameter read 192. I rounded it up, for no good reason, to 200, with no significant
change. I tried it on a few other indexes.
It looked pretty damn good to me.

I went thru the same proceedure with the medium and then the short-term trends.
Draw the trendlines (several of each within my LT trend), dial the parameter til it fits. Worked
like a charm. Parameters came out at 45ish for the medium-term and 15ish for the short-term
trend.

After weeks of messing around, fiddling, I went to that Woodies.com site where I knew that
CCI experts hang out, or had hung out.
Most folks there seemed to agree CCI(14) is best for short-term index trading, proven thru
their backtesting (altho they used all sorts of nuances and patterns as well).
Sounded good to me. Confirmed my findings.
I didn’t see anyone using higher parameter levels in trading.

However, that plotted CCI(14) line seemed a mite sharpish so I smoothed it a little by
combining CCI values slightly above and below 14.
Did the same with the 45 level as you can see in the formula.

And then I just observed and observed and observed, for months.
There’s nothing like screen time to teach you to spot patterns, divergence, good entry/exit
levels. Screen time burns those things into your brain, so they jump out out you as a chart
develops.
(And now a false question - I’ll slip it in.)
Enough already about how you figured it, and we know about finding the health of an index –
WHAT ABOUT TRADING? Can we use it? And you plotted another line, yellow, what’s that?
You blind or something? (I’m allowed to be rude to myself)
Look at the damn chart.

“Buy In The Dips” - Short-term trading - Around 2-12 days avg.

When the MT trend is above zero (the higher the the better), and the ST trend dips below
zero then turns back up – does that look a likely long entry setup?
I put the green arrows on them for you.
Vice versa for shorts when a MT downtrend is in place.
Basic entry strategy is to place a conditional order to buy, if & when the market
strengthens/falls by a predetermined amount the following day.

Figure your own exits. My initial stoploss, placed immediately on a fill, converts to a
breakeven stoploss, then converts to trailing stoploss. Whatever, I like to be out if the ST
trend sinks below the 100 level.
Leave runners in place if the MT trend is still high.
NB. Get to LOVE those runners.

Anyway, as someone has said, “ What Genius! Buy low! Sell higher! ”.

You’ll see on the chart I also added an “advance warning” indicator, that’s the yellow CCI(6).
Note how it sinks below –100 on good long trade setups. Sometimes turns back up before the
black ST trend - advance warning.
When that yellow line drops below –100, and the black ST is below zero but yet not turned
back up, I’ll often immediately place that conditional buy order.
If that yellow line drops below –100, I may even place that order if the black ST trend is still
above zero – but only if the MT trend is Strong, say above 50. There are two or three
instances of this on the above chart, not arrowed of course because they don’t meet the basic
ST entry criteria.

I forgot - One final question

Can I use this on individual stocks?
Yes you can.
An individual stocks’ market can also be viewed as an index of all its trades.
Guys often say to me, “This stock looks likely! Whaddayareckon?”
I slap the indicator on them for a quick health check.

The problem with using it for TRADING individual stocks is that they are (always?) more
volatile than their common index, which is what it was designed for. Those trends can jump
about so erratically on stocks.

One approach may be to wind the ST parameter up to say 20, thereby signalling only the
better entry setups. Maybe wind up the MT and LT parameters also - by a relative amount
perhaps? Therebye we’d have a new DOW WAVES formula just for individual stocks.

You could also perhaps keep the parameters as they are, but restrict your setups to those
occuring when the MT trend is over 50, or over 75, therein saying the MT trend has to be very
strong, not just positive, before you accept it as an entry setup.

Another recourse could be to gather a watchlist of stocks that trend smoothly, maybe
regularly, methodically or boringly are better words. You know what I mean, stocks that
accept well the indicator signals.

You could use a combination of all these strategies.

Oh, and writing an Exploration for stocks that meet the parameters would be easy, and an
effective way of getting a list of prime candidates.

You may also have to adjust the “insert levels” for the arrows on the indicator.

One final bit of blather.

Lots of the experts say we should have a setup to signal likely entry areas, and then a trigger
to force the entry. Can’t remember the reasons why they say this.
Whatever, I’ve got a trigger that often gets me in a day earlier.
It’s the old advance/decline line. Not that in-built one in AB that wanders slowly about, but one
built with AB’s cool “AddToComposite” Function.
From the members of the index I’m trading, I simply calculate the no of Advancing stocks
minus the no of Declining stocks, nothing fancy. I’m telling you this is often a leading indicator
of price action. It often rises on a red candle day. Boy is it volatile. Just what I want.

Let’s say I’ve got a PRE-long entry setup on the chart (red MT>0, and black ST<0 but not yet
turned up), and the volatile AD line has turned up. That conditional order of mine is in
immediatley. If the market moves up the next day, by that predetermined amount, I’m in.
If it doesn’t go up high enough, doesn’t go up at all, or if it drops, I’m not in, I’m safe.
Try again tomorrow maybe.

I guess what I’m saying is that around entry setup time I want to feel the urgent breath of the
market on my cheek. And I want to feel if it’s blowing hot, tepid, or freezing cold. That’s what
this AD line does.

I didn’t put it on the chart above as I thought it may confuse you.

I plot it as an unobtrusive little grey line in the background, scaled to just oscillate around the
zero line. Entry setup time – I go looking for it.
I reckon that as we are short-term trading here we need to get in as early as safely possible.
IMO this is a risk aversion, profit increasing strategy.
For individual stocks use C-ref(C,-1) as a relacement for the AD line. Works good.

I forgot again! I said earlier I’d prove to you that the common momentum indicators give
very similar results. Here’s another two. I’ve plotted them under the DOW WAVES (created
using the CCI) in the Chart below. See what you think.
First the Relative Strength Index (RSI).
Note I plot the 50 line. IMO it’s the momentum equilibrium level of the RSI – equates to the
zero line in the CCI.
I also deleted those silly O/B O/S lines. Absolutely Guaranteed to make you miss good trades
in a strong trend, they are. Plot them here and I’ll kick your backside from here til Christmas.

Second the Rate of Change (ROC)

I haven’t plotted the LT trend, because I haven’t got around to sorting out its paramater, but
you get the idea, right?

Convinced yet? Probly should have showed you the Stochastic one also. Guess what – Yes,
it shows the same thing! I’ve got fifty or so that say the same thing – So Get Convinced!

Just one other thing and I’ll shut up.

That ADX, that we use for measuring trend strength. It signals strength when it’s rising, it
signals strength when its falling, supposedly around/above the 25 level, and it lags something
terrible.
You’ve also gotta check it along with the Directional Movement Index for it to make proper
sense.
While without doubt it’s helpful, it’s all rather confusing.
Consider replacing it with our red Dow Wave.
It clearly shows whether the trend is up or down, it precisely measures trend strength, it sure
doesn’t lag, and, even better, its on the same pane!
A better ADX, cool.

Regds everyone and good trading

Gerard