The Envelope Nominal Model
The system use 3 different Envelopes (sometimes 4) based on a Centered Moving Average to which I add or substract a fixed value which is a « Gann’s Octave » or a subdivision of the said Octave.
The nominal “model” (average, theoretical) I use is based on 32, 128 and 256 Trading Days (TD) Centered Moving Averages and Envelopes.
This « model » gives excellent results for most of the indexes and shares that I follow ( 150).
The nomenclature
The principle is very simple :
when Price reaches the Upper or Lower Limit of the Envelope 32 (blue) a Top or a Bottom is formed, we note it T1 or B1
when Price reaches the Upper or Lower Limit of the Envelope 128 (ocre) a Top or a Bottom is formed, we note it T2 or B2
when Price reaches the Upper or Lower Limit of the Envelope 256 (brown) a Top or a Bottom is formed, we note it T3 or B3
Building the 1 Year Enveloppe (Enveloppe 256)
Let’s analyze the Brazilian BOVESPA Index as of today December 26 th .
Let’s assume that the “ Fractal of Price” within which the price action of the BOVESPA fluctuates is 25.000 / 75.000 , therefore 50.000 points.
Let’s divide these 50.000 points by 8. We get 50.000/8 = 6.250.
This is the “Octave” – value 6.250 points.
Let’s add and substract this “Octave” (6.250 points) to the Centered Moving Average 256 TD. We have built the Envelope 256 TD (the brown one)
Analyzing the BOVESPA Envelopes
We observe :
8 Bottoms noted B3 and 8 Tops noted T3 which underline 7 Upswings (Waves) in green and 7 Downswings (Waves) in red of the same “order”, “degree” “ magnitude”.
This way we have identified 7 “composite” Cycles from the first bottom of October 2008 27 th up to September 2015 29 th.
We have by using this method identified 7 “composite” Cycles in 7 years within the Envelope 256 (1 Year) – which in this case is very coherent.
The proof is in the pudding. The fluctuations of the BOVESPA are related to the Gann’s Octave on which the Envelopes are build at :
– short term ( 32 TD – blue),
– medium term (128 TD -ocre)
– long term (256 TD, brown).
All the fluctuations of the price action are included in the 3 various Envelopes.
How to use the DEPTH of an Enveloppe for analyzing and trading
By construction we know that the DEPTH of the Envelope 256 (1 Year ) is in average of 12.500 points.
This mean that a Swing – up or down – WITHIN the Envelope 256 has a maximum extension of 12.500 points ( in the BOVESPA case in 6 months duration in average).
This allows us to have a good approximation of our potential profit when we go Long or Short.
Let’s assume we wanted to SHORT the BOVESPA after the last Top T3 May 2015 the 5 th at 58.052.
We have identified this possibility because Price goes slightly over the upper limit of the Envelope 256 then reentered the Envelope 256. We saw this reentry move as a good entry point for a short.
Then with our structural and historical knowledge we could assume a Downswing of more or less 6 Months duration, for more or less 12.500 points, therefore a potential profit of 12.500 / 58.052. = 21,55 %.
Analyzing and Estimating the Underlying Trend with Envelopes
Moreover we can calculate an estimation of the 1 Year Underlying Trend.
As Hurstians you know that in the present case the 1 Year Underlying Trend is the sum of all cycles whose duration is more than 12 months.
Let’s do it graphically in a simplified way.
Let’s assume the UP swing started October 27 th 2008 at 31.250 and ended November 24 th 2011 at 75.000 (in fact a little less, a little sooner).
We can note that the Upswing was of 75.000 – 31.250 = 43.750 which divided by 6.250 gives us 7 Octaves.
As we know that the DEPTH of the Envelope 256 (1 Year) is 12.500 (2 Octaves), we know that during the Up move the strength of the 1 Year Underlying Trend was of 5 Octaves.
Which means that the 1 Year Underlying Trend of the BOVESPA has contributed for slightly more than 70 % to the Bullish Move.
Conversely we are now in the 43.750 Area.
We went from slightly less than 75.000 (73.000). The Down Move was of 31.250 points (5 Octaves), in fact 29.250 points in 1227 Trading Days, a little less than 24 points per Trading Day.
We can integrate this parameter in the estimation of our Down Swing Target Price (IF the Underlying Trend is constant)
(to be followed)
Welcome Alain! Hurst envelopes are indeed a fascinating subject. I look forward to your follow-up posts. Are you counting trading bars as opposed to calendar bars? In other words a year is 256 days instead of 365?
Yes David I use Trading Days.
a year is 256 Trading Days . This is an average (rounded) according to the work of an american trader.
Anyway this allows the division of the year by 8 which is coherent with the division of price by 8.
One of the main concept of Gann is that Time and Price are linked and that you can convert one into the other and conversely. Gann wrote than when Time and Price are “squared” they are balanced. For Gann the (1×1) Angle (1 Unit of Price x 1 Unit of Time) is “the most important” even if in fact it is a rare situation.
This “Angle” is also in fact a moving average.
Using the Enveloppe “Nominal Model ” allows everyone to rationalize or hierachize the reading and interpretation of :
– Waves
Using the Enveloppe “Nominal Model ” allows everyone to rationalize or hierachize the reading and interpretation of :
– M Shapes
Using the Enveloppe “Nominal Model ” allows everyone to rationalize or hierachize the reading and interpretation of :
– Harmonic Patterns
Hi Alain
Nice post.
I have a question however, as I used centred channels before for quite a while, on and off, and found them great sometimes but not all markets because of the half period lag which can leave you hanging in limbo through indecision.
You say you are using centred ma’s, so do you mean displaced ma’s, as in Pete Amaralls book, but your pictures are showing fully developed channels up to present bar, so can I ask how you are projecting your channels up to current bar, as with centred ma’s we are always lagging by half a period are you not, ie a displaced moving average.
ie 256 day channel would lag current bar by 125 days, or am I missing something or am I getting confused.
Have I got the wrong end of the stick as we say.
Anyway, that was my question, as having read the Hurst book as well as the Brian Millard books 9all of them) on displaced ma’s and channels I can say that displaced channels gave me a headache trying to keep up with price action even using other indies to help, as well as Elliott wave analysis, which I still apply to this day, E WAve that is.
Would appreciate any new insights into this.
Also I have seen software, Omni Trader I think that draws regression analysis channel and lines to project future channel lines but not sure how effective they are in real time.
Have you any experience of these methods ?
Keeping it short
regards
Robert
Addendum to comment to Alain
Hi again, just want to say I want to make the channels work for me as I really like them so hope you didnt take my comment the wrong way.
Even now I have some drawn over Euro as I trade it.
Also I have tried Channalyze software from Brian Millards son, I think he is in charge of it, might be mistaken,
but kept crashing on my pc so reluctantly had to leave that option, but if you are making them work what do you do differently?
regards
Robert
Hi Robert
Sorry to answer so late. Yes I use Displaced Moving Averages as per Hurst and Peter Amaral booklet.
yes it lags half of the period.
You can try to “fill the lag” with various method. Brian Millard researches test a lot of it during his life. None is perfect. They gives only estimations. Using Excel (and Sentient Trader) I just use the same calculating formula of the DMA AFTER the cut-off.
Anyway for the analysis it is most often not a real problem. The Enveloppes System linked to Gann’s Octave or Vibration gives so many useful informations.
> You can try to “fill the lag” with various method. Brian Millard researches test a lot of it during his life. None is perfect. They gives only
> estimations. Using Excel (and Sentient Trader) I just use the same calculating formula of the DMA AFTER the cut-off.
Would you please provide more clarification on how you do that? I’m thinking you just attach another DMA at the end of the original DMA? Details, please.
Robert
on the graph hereunder you can see the various cutoffs. The Enveloppes AFTER the colored dashed vertical lines are just a simulation.
you can observe that it does not really disturb the general analysis. Notwithstanding all the fruitful informations given by the graph.
Envelopes with the Dow jones
Another Envelope of the DJIA on a shorter duration (2014-2014)
If we look at the Underlying Trend (1 Year) of the DJIA, we can observe that, since march 2009, this trend added 10.000 points to the Upswing.
As the depth of the 1 Year Envelope is 2.500 points. We can conclude that 80 % of the gains were given by this underlying trend
Alain,
Did you do a simulation for silver?
Silver Envelopes 2013-2016
Trend is obviously alvays down
Composite Cycles have shortened in Period by 1/3 – from 6 to 4 Months and in Amplitude by 50 % – from 1,5625 (depth of the Envelope 128 – ocre) to 0,78125 (depth of the Envelope 32 (blue)).
A 3 Year Envelope (768 Trading Days) since 2002 for JUNIPER (JNPR)
Octave is 12,5. Depth of the 3 Year Envelope is 25.
EXXON Dominancy Envelopes
I wonder if you have enveloppes and some other projections for vix short term and long term. I think your work is very interesting.
great sir,
I used this for india nifty 50 analysis. i took the entire range ie. all time low and all time high and divided the entire range by 8 to get the major octave. I took 256 day centered moving average and added/substracted this octave from 256day CMA for long term analysis. Then i took 128 dayCMA and 1/2 of the major octave for medium term, 64 day CMA and 1/4 of the major octave for short term. it works so amazingly. i did it on excell. I think the period for CMA and the octave to be used (ie octave or subdivisions) will have to be selected according to the nature of indices or asset prices.