Wavelet analysis - cycles early warning system. When you hear that some cycle, let's say with a period of calendar days, is strong for some particular financial instrument, - you always should ask what time span is used to reveal this cycle.

There are special math procedures that immediately reveal any constantly working cycles if they only exist , and this analysis does not leave any chance for the existence of constantly working tradable cycles. Though this analysis reveals the existence of long term cycles Annual, Kitchen, Juglar cycles , but these cycles are too long for traders.

Does it mean that the cycle analysis is not applicable for the stock market? We have to accept that cycles live their own "lives": The cycle's life time is limited, and we need to deal with this fact. As I know, historically the first one who applied this approach to the stock market was John F. Elder; it is known as MESA analysis. We are developing this approach further. A wavelet is a wave limited in time; it is a piece of some regular wave.

Wavelet Analysis for Financial Market Data gohabizaw.web.fc2.com

In the picture below you can see a regular wave together with the wavelet:. While the regular wave is not limited in time, the wavelet exists within some finite time interval.

It is used a lot nowadays: For the stock market application of this idea, the most important feature is wavelet diagram. This is the example of this diagram:. You can take the wavelet diagram as a history of the cycle's life. It shows the bio of any cycle right away: The horizontal axis represents TIME while the vertical axis shows the PERIOD of this cycle.

The hot red and yellow zones represent active zones - the periods when cycles are active. So looking at this diagram we can easily say how many cycles are active on the stock market now and the bio of the each cycle whether it is newborn, young and strong or old and weak.

So, our goal is to reveal the cycle as early as possible. When the cycle becomes obvious for all, this is a sign that this cycle is weakening, and its time is over this is the way how the Efficient Market Theory is working in the cyclic analysis.

I have found a good analogy in military. They have such a thing as a ballistic missiles early warning system; this is the system that finds the enemy missiles as early as possible. Similar to that, our main goal is to reveal the young and strong cycles as early as possible, otherwise this cycle being unattended can destroy any of our trading strategies. You can take the wavelet technology as a system of early warning for the trader: This is the "red alert", and you need to pay some attention to this cycle.

Just watch this cycle, we don't know how long this cycle might live.

Stock prices trends analysis using wavelet transform - IEEE Xplore Document

The technique is very easy here. It is based on the "drag and drop" cycle model; this approach is explained in this class: Just make a mouse click on the spectrogram around those peaks;. You can hide the spectrum module now clicking on this button. From now, you will work with the wavelet module only. Move the mouse cursor to some red stripe that represents the strong cycle and make the left mouse click:.

As you see, the program puts this cycle into the cycle box and marks this cycle by horizontal line on the wavelet diagram. Now drag and drop these cycles from the Cycle box to the Main screen or click button , and the program will immediately calculate the projection line based on these cycles:.

You can also remove any cycle from "Cycle Box" "Delete" button or delete all cycles "Clear" button. I recommend to pay attention to the "age" of the cycle. The age of any cycle is calculated in its period. If we consider another cycle with the period of days that is active within the last days, we say that the age of this cycle is 2 periods.

I recommend to take into account the cycles that are active periods at least. To see the age of any cycle, look at the red bars while moving the mouse cursor through the wavelet diagram. These 3 red bars cover a time interval of three cycles:.

The red stripe on the wavelet diagram should cover the time interval of 3 cycle periods at least. For intraday data, the program automatically switches on the bar metrics, in other words the period of the cycle is measured in bars not in hours, days Accordingly the period vertical scale on the wavelet diagram shows us the period in bars:.