Volatility & Dominancy – 14 May 2014

Hello all

After reading this excellent post by David, “20 Week Cycle Dominance – 2 May 2014” , I want to share with you some ideas running in my head for some time about the “dominant cycle” and about what I mean when I believe that a particular cycle oscillation is almost disappearing.

As David mentions in the post, “…The subject of cycle dominance is a fairly big one…”, I think also it is like that.

Please let me explain some ideas about the concept of dominant cycle.

When trying to understand it, I can imaging Hurst trying to explain the cycle behavior in a static graph printed in a paper, and it is reasonable to think that the starting point for cyclic analysis is to visually establish what Hurst called the dominant cycle, and it is like David says: “…a dominant cycle is the cycle that is most visually apparent on the chart, the cycle that creates the most obvious cycle shapes…”.

It is specially true when considering a static chart but when you do zoom out in “modern systems” the dominant cycle could be longer and longer each time, reaching such a level for considering it as a too longer in relation to the time frame we use to trade. Please correct me if I’m wrong, but I believe that Hurst said something similar to this: “the dominant cycle is the longer cycle that is most visually apparent on the chart, the cycle that creates the most obvious cycle shapes in which we can identify at least 3 full oscillations”

If it is like that, I think that the concept of dominant cycle depends only in the time frame and number of bars showed in a graph and it can fall far of interest for our trading porpoises .

Being at this point I would like to talk about the other obvious meaning of dominant, and I would say that it is the one which is better understood by everyone, I would say that we must better talk about the dominancy (the condition of being dominant) of a cycle, in other words, we must better talk about the popularity of a cycle in the neighborhood of our trading cycle.

And I think that this dominancy or popularity of a cycle is in direct correlation with volatility, and I think it makes sense.

Let’s see an example of what I mean. Let’s say that our trading cycle is the 20 day cycle, the SUT is up to two cycles, the 80 day cycle, which also marks the 8 trading opportunities, at the same time we have the necessary of at least 2 cycles bellow for a good analysis, the 10 and 5 days cycle, so I’m considering our ” cyclic neighborhood” from the 80 day cycle down to the 5 day cycle in this example.

I think this statement is obvious, when volatility decrease the dominancy shifts from longer cycles to shorter cycles meanwhile when volatility increase the dominancy shifts from shorter cycles to longer cycles. When volatility decrease the oscillation of the longer cycle tend to almost “disappear” favoring better and more recurrent oscillations in shorter cycles and vice verse.

I also think, as we all may agree, that when we have decreased the volatility too much, then, a extreme movement is ready for starting and that a the longer cycle is prepared to take control.

The big question here is how we can decipher if we are entering into a decreasing volatility scenario or vice verse. In this sense I believe that the mathematical approach has something much to say about this.

Best

José

NOTICE: I post here my answer to Jonathan’s comments bellow in order to include a picture, it is not allowed insert one when answering the post!

Hello Jonathan

First of all I would like to thank you for sharing your thoughts and for contributing to the discussion.

What I’m suggesting is quite complex and difficult to show, but I would try to make it clearer.

I labeled the post as “Beyond Hurst” because my intuition is telling me I’m in a region bit out about what Hurst said. In any case, I’m fully agree with the dominant cycle concept; if we take the 20 day cycle as the fix trading cycle of our strategy we my have the dominance of longer cycles distorting FLD interactions.

I’m introducing a new prism about having a “fix trading cycle”, instead of that, we may have a “dynamic trading cycle” depending on volatility.

This nebula came to my head when I started to use the intraday version of Sentient Trader 3 years ago, when using it, I liked to trade sometimes the 1 day cycle but others I preferred the 2 day cycle, or even longer cycles, depending of time and the market, crazy, isn’t it?. Well, what I didn’t realized is that I was desperately looking for the nicest FLD’s interactions; it is clear that nice interactions mean confidence in what’s next. For that time I couldn’t even realized what was happening or how to decipher when these “shifts” happen.

Just after that, David launched the 20 day FLD strategy giving to us a great amount of light and safety while trading, thank you David!. I must say that probably the 20 day cycle is the most stable trading cycle from any prism you may apply.

Once here, I was wondering what’s the meaning of a stable cycle or stable interaction, the answer came after doing some job with the mathematical approach, in my personal opinion the answer is “stable oscillation” which, in my opinion, is the most repetitive ans sinuous oscillation…. and this oscillation is what I think is dynamic depending of the volatility.

Please take a look to the chart bellow, the indicators bellow are representing the 80, 20 and 10 day oscillation. Meanwhile the oscillation of the 80 and 20 day cycle seems to be rapidly diminishing (disappearing), the 10 day oscillation is making nice and evident oscillation. I would say that if you trade that cycle you would be more efficient in your trading meanwhile if you stay in your fix trading cycle you may be waiting and waiting until the cycle restarts its popularity.

I think it is evident in the chart that this process is in direct correlation with volatility

Best

José