The Hurst Trader

I have written before about the “grand plan” for the screensaver, and I’m pleased to announce that the final manifestation of the screensaver has now arrived.

What does the screensaver do?
Apart from the obvious: the screensaver uses your computer’s processing power when you are not using it, in order to:

• Perform backtests on a data series, according to the trading settings that were active on the chart at the time that you assigned the chart to the screensaver. This is an important point – you can test different trading settings by assigning the same chart to the screensaver several times.
• THT runs TWO backtests for every cycle of the nominal model (from 5 days to 18 years) that it finds in the data. One of the backtests uses the Nominal Model as the basis for the analysis, the other uses the Initial Cyclic Model as the basis for the analyis.

How to use the screensaver
The best way of explaining is by example, and so here is an example of using the screensaver, using the S&P 500. I am going to try to make this as easy to read as possible, so I am going to use many pictures, instead of long dense explanations!

• First of all I downloaded historic data for the S&P 500 from Yahoo Finance (it is reliable data, and free!). Simply click on the “download to spreadsheet” button at the bottom of the page, then change the name of the table.csv file to something more meaningful, such as sp500.csv.
• Then, very importantly I set the analysis start date. I have written about this several times on the Hurst Trader forum, and also spoken about it in several webinars. Basically you should set the start of analysis to just before a trough which you consider to be of some importance. I set the analysis start date to mid-July 2007, because I believe that the trough in mid-August 2007 is a trough of the 54-month cycle.
• There is something else that you should understand about the screensaver and the analysis period (how much data you assign) – it doesn’t start trading from the very beginning of the data, for fairly obvious reasons: it needs some data to perform an analysis in order to make trading decisions. THT will use anything from 80 to 400 bars to perform its initial analysis, before trading. In this example THT will use 400 bars, and so I don’t expect to see any trades before about August 2008:
  

  Note the first 400 bars will NOT be traded

• Then set all your other trading settings. In this example I am using an Expert model because that enables THT to identify longer cycles in the data than it would have otherwise. Using this expert model it will find troughs of cycles up to 54 months, whereas if I hadn’t used the Expert model, it would only have found troughs of cycles up to 20 weeks long. (I am using such a short analysis period so that I could generate this example quickly – normally one would use more data). To understand more about Expert models, take a look at the expert model webinar. The benefit of finding longer cycles is that it improves THT’s underlying trend calculations (see webinar #10)
• Then assign this chart to the screensaver:
  

  Assign to screensaver

  If your screensaver is processing some other data, and you want it to move straight on to this new data, simply click on:

• 

  Reset the screensaver to have it start a new sequence of backtests

  Note that you can assign many charts to the screensaver. It will queue them.

• Then take a break! Let your screensaver run. It will shut down every hour, so as to purge the vast amount of information that it builds up, but will start up again after the standard screensaver delay.
• Next is the fun part – while you’ve been drinking tea, or enjoying your life in other ways, THT has been working hard. On my computer this took 4 hours to complete – obviously with more data you can expect it to take much longer (see why I chose a short analysis period?)

Importing the trade histories
Now the fun begins. THT has been working as your trading research assistant, and has some interesting information about which cycles would have been best to trade over the time period that you specified as the analysis period (less the first 400 bars…)

• Open the trading history list for this data file (you can only do this from within a chart):
  

  Import a trading history

• Note that THT presents a Nominal model and Initial Cyclic model history for each cycle that it found in the data. Choose one that you’d like to look at:
  

  A summary of trading histories

  There are two side-points worth noting here:

• • The Nominal model has performed much better than the Initial Cyclic Model on this data series. This will not always be the case, and is hardly surprising in this example, because the S&P 500 is an index, hence an average, and should be close to the Nominal model.
  • The 5-day cycle is not a reliable cycle to trade! I know many people like to trade short-term, but I have found that the 5-day cycle seldom offers reliable results.
• This particular trading history includes an Open trade at the end of the history – note how THT creates exit orders, and will start monitoring this trade. If you ran the screensaver a while ago then you will probably have to exit this trade manually.
  

  Open trade with exit levels

• But why stop there? One of the questions I often get asked is “what if I were to trade more than one cycle at the same time?” Well, let’s see. I quite like the 40-week Nominal Model results as well:
  

  Summary of 40-week trading cycle

  Note that you can import many trade histories, and THT will handle them all in the same chart, but in order to trade more than one cycle you will have to create a new chart for each cycle.

• Next we will have a look at how we would have fared trading the 40-day and 40-week cycles between about August/September 2008 and November 2009.

The Trading Reports
So how would we have performed, trading the 40-day and 40-week cycles?

First of all, a disclaimer: Please bear in mind that I am presenting hypothetical results here. I am not making any representation that your trading account would have experienced the same profit or loss. Also remember that past performance of a trading method is no guarantee of future performance.

And so, let me rephrase that : Hypothetically, how would THT have performed?

• Open the Trading Report for the chart:
  

  View Trade Reports

  Note the first 400 bars will NOT be traded

• 

  The trading report

  There is a lot of information there, which I will explain in webinars, tutorials, and on this forum in the fullness of time, but for now, a few points of interest:

• • The most important number in the whole report is possibly the first one that I have highlighted – Profit Factor Two. This is the ratio between the average win and the average loss. Note that in fact THT was only right about the trades it made about half the time, but … the average winning trade (when THT was “right”) was more than 3 times as big as the average losing trade (when THT was “wrong”).
  • I have also highlighted the Annualised % return, because that is a figure that means something to me. It is certainly more than I would get by having my money sitting in a bank. Bear in mind that this return is achieved by risking no more that 2% of equity per trade (in theory – gaps and other market events could make that number higher).
  • Finally notice a very important number – the Maximum % drawdown. This is the maximum amount that the account went down (experienced a run of losses) during the period. In this example that amount is 7.77% (on the 2nd of September 2009). This is a useful figure, because you should always assume that from the moment you start trading, you will hit that maximum drawdown period straight away. Most people would recommend that you double that figure, so in this example you should assume that it is quite possible that you will lose about 16% of your equity before you make any money.
• Finally let’s take a look at the Equity graph:
  

  The equity graph

  The blue line is the actual equity for every day. The thin red line is the maximum intraday drawdown, and the thin green line is the maximum intraday gain.

• Note how the maximum % drawdown is visible on the chart. That 8% drop in equity would have required a good mental attitude (trading psychology).

Well that wraps up the use of the screensaver in THT. Two parting comments:

• Opening trading histories generated before September is not likely to work. THT will try to update the file format, but very old history files will be incompatible. In any case the phasing analysis of THT at that time was unreliable, and so the trading history files are meaningless anyway.
• Remember that trading histories built by the screensaver are the result of a purely automated process, and represent a “worst case scenario” because THT takes the most aggressive trading approach of entirely trusting its phasing analysis, and entering trades without any reference to a consideration of the market as a whole, and countless other factors that an experienced analyst and trader would be able to apply. For this reason I am actually against this sort of automated backtesting! But I also recognise that there is a place for it, so long as the results are taken with a “pinch of salt”, an understanding of the limitations of a purely automated process. A better process I believe would be stepping through the data bar-by-bar and applying some of your own experience and knowledge to the situation. (Of course you can do this with THT, but it is more time consuming).

I keep writing all sorts of nonsense on this blog, but the one thing I haven’t got to yet is what the software is doing right now. That’s because I’ve thought I needed to prepare the ground, explain things, describe the trading theory at length … but instead I’m just going to take the plunge. Pictures say it all:

This is a chart of the Euro-USD exchange rate, produced by the software, analysing data up to Friday 30th May 2008.

• The thick BLUE line is the “price” line – the exchange rate between the two currencies.
• To the right you will see the price scale, with the closing price of Friday 30th May highlighted in a red box – it is red because the price has FALLEN (is lower) from the previous day’s closing price.
• The thin multi-coloured lines are the lines Hurst calls FLD’s – Future Lines of Demarcation.
• Price is surrounded by a “dominant channel”  the purple dotted lines that form an envelope around the price movement.
• Along the bottom of the chart is the last part of the phasing analysis for this chart. To the right you will see the cluster of small circles within lines, with a grey shaded background. This indicates that we expect a nest-of-lows within the next 7-10 days, with a strength of about 20 weeks.
• You will also see some VTL’s – Valid Trend Lines, as defined by Hurst. These are the straight dotted lines, with small boxed labels giving the wave period of the VTL.
• Notice also the TRIO of moving averages, moving around the price line. One is dark red, one blue and one green. These lines are not Hurst-inspired, but are a personal refinement by which I calculate refined FLD projections.

I’m not going to explain at length what this chart means because that would take several pages of discussion. For now I just wanted to give a glimpse of what the software is doing. Having said that, here is the commentary generated by the software, which pretty much does that for me:

Updated Phasing Analysis reveals that the dominant cycle has a wavelength of 16.9w, or 118 days. This is assumed to be the 20w nominal wave, which implies that all waves will be (-14%) shorter than nominal. This cycle is approaching a TROUGH (and a medium degree nest-of-lows). The underlying trend to this cycle is currently FLAT, likely turning DOWN. The future FLD indicates that this cycle will influence prices to peak in a short while, and then to fall.

The sub-dominant cycle (next wave down from the dominant cycle) has a wavelength of 58.9d, or 59 days. This is assumed to be the 80d nominal wave. This cycle is overdue for a PEAK. This is probably the second of 2 sub-waves. The underlying trend to this cycle is currently FLAT, likely turning UP. The future FLD indicates that this cycle will influence prices to peak soon, and then fall.

The pre-dominant cycle (next wave up from the dominant cycle) has a wavelength of 33.9w, or 237 days. This is assumed to be the 40w nominal wave. This cycle is approaching a PEAK. The underlying trend to this cycle is currently strongly UP. The future FLD indicates that this cycle will influence prices very little because despite near-term volatility the FLD becomes range-bound.

Σ L is currently FLAT. (value of: 0.0)

The last phasing analysis was 4 days ago. In that time price has FALLEN by 244 to 15521.
Sequence #1 of the previous pattern: Price did move DOWN (for 3 days) as expected and has moved towards the target of 14954. The closest price has gotten to this target so far is 15394 (2.9% short) 1 day ago. This target is now 38 days away.
This brings the price movement up to date. From this point on:
Sequence #1 is expected to reach a LOWER target of 14808(-146 diff) 4 days EARLIER, on 2008/06/12 Recent price action has generated a new sequence (# 1). The target of this projection is 13624, expected by 2008/10/06.

CURRENT PROJECTION PATTERN:
Price is currently range-bound (last close 15521), in an active FLD pattern cascading down. Price crossed below the 15 day FLD 1 bar ago, implying a price fall to 15467. This move would imply a price cross below the 29 day FLD (est: 2008/06/03 & level: 15498) projecting price to a CONGESTION PAUSE ZONE at approximately level 15436  Then price is likely to CONTINUE DOWN after a pause, towards fulfilling the 16 week cycle projection of 15402  taking price into a CONGESTION PAUSE ZONE at 15431 by about 2008/06/09  Then price is likely to CONTINUE DOWN after a pause, towards fulfilling the 59 day cycle projection of 15342  taking price into a CONGESTION PAUSE ZONE at 15429 by about 2008/06/09 . This price move breaks below the 33 week VTL implying that the peak on 2008/04/23 is the expected peak of the 15 month cycle. Then price is likely to CONTINUE DOWN after a pause, towards 14866 by 2008/08/09, attempting to fulfill the projection generated by the crossing of the 58 day FLD taking price into a CONGESTION PAUSE ZONE at 15257 by about 2008/07/03 . This price move breaks below the 16 week VTL implying that the peak on 2008/04/23 is the expected peak of the 33 week cycle. Then price is likely to CONTINUE DOWN after a pause, towards 14522 by 2008/11/09, attempting to fulfill the projection generated by the crossing of the 33 week FLD taking price into a CONGESTION PAUSE ZONE at 14782 by about 2008/10/05 . This price move breaks below the 15 month VTL implying that the peak on 2008/04/23 is the expected peak of the 46 month cycle. Then price is likely to CONTINUE DOWN after a pause, towards 13572 by 2009/07/15, attempting to fulfill the projection generated by the crossing of the 15 month FLD taking price into a FINAL REVERSAL ZONE

There is no cycle which provides an average potential of at least 20% per half-cycle, and so it is not recommended that you trade this stock unless you are trading on a leveraged basis, in which case you should change the Trading Settings by using the Tools|Trade Settings|Edit menu.

Having reviewed the entire projection sequence I am unable to find a move suitable for trading, and so no trades have been set up.

 Well – that’s what the software is “thinking” about the Euro-USD as of the 30th May. It seems pretty likely that things are going down, and that the upcoming nest-of-lows will generate little more than a temporary upward correction to the downward move. However it is early days for the software, and so I am by no means making any kind of call on this, I merely put it up here to show what the software’s doing at the moment.