Its been a busy two weeks here. We've been working on some improvements to existing tools. Although most of this effort was geared towards our price forecasting algorithm, we did find some time to upgrade the Cycle Forecaster. The main improvement was allowing the Cycle Forecaster to forecast price data other than the close. This means that we can now experiment with forecasting oscillators, moving averages, and even another Cycle Forecaster. Below is an example chart:
The Cycle Forecaster is the blue line at the bottom. It is forecasting the value of a 9 bar MA_Momentum curve 7 bars into the future. The interesting thing about all oscillator-style indicators is that they are really nothing more than simple cycle measuring tools. By normalizing the oscillator output between a high and low value, what we are really doing is trying to determine whether we are at cycle high and cycle low points. For example, a 14 bar %R oscillator is attempting to pinpoint turning points in the 14 bar market cycle. By adjusting the look back factor, we are trying to hone in on different length cycles. The reason why oscillators get wildly overbought/oversold and stay that way in trending markets is because the market's dominant cycle has a length greater than the look back parameter the oscillator is using. Once the composite market cycle length falls to a level less than the look back parameter of the oscillator, everything works fine again.
Although MA_Momentum is not normalized to output values between two given levels, it does normalize price movements in its own way through a detrending process which attempts to locate the cycle highs and lows just like a SlowK or RSI. The advantage to it is that there is really no such thing as wildly overbought/oversold anymore. We are only concerned with those areas when the momentum curve changes directions and makes a turning point. This fits in well with the Cycle Forecaster's method of computing cycle extremes, and is the reason we chose this oscillator for this example. By feeding the Cycle Forecaster the MA_Momentum curve rather than pure price, we've done some preprocessing to help our algorithm to more easily do its job. It is easier to search for cycles in data that is inherently cyclical rather than data that has strong trending periods.
That was a long introduction! Let's look at the chart. What the Cycle forecaster is doing is trying to predict the cycles in the MA_Momentum curve. These turning points should correspond closely to the pure price data, and we have marked them on the chart above with red and blue arrows. Whether an arrow was red or blue doesn't mean much - they were put that way because it looked good. Like the original Cycle Forecaster, you have to look at these points as good places to place a trade rather than pure buy and sell signals. If you look at the chart you'll see that for the most part these areas were good places to place trades. That is the purpose of the Cycle Forecaster - to find places to make trades, not to predict price action. To determine direction, and actual entry signals, we recommend using other tools like MA_Momentum or Exhaustion Bars.
April 13th is the next turning point on the chart above, so this tool says that would be a good time to look to put on a trade. Although it looks like a sell might be in order, you have to go to your confirming indicators to see what they have to say when the time arrives. Happy trading, and stay tuned!
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