Momentum Trading Using Fourier/Wami Optimization by Anthony W. Warren, Ph.D.
Technical analysis and the use of indicators may lend itself to well-defined rules for trading, but most traders develop their methods into more of an art form. Here, a longtime Stocks & Commodities contributor explains the use of prestored indicator designs and ways to evaluate and refine custom trading rules.
Previously, I described a method for using Fourier analysis and a new momentum indicator for momentum optimization and trade timing, which I called Warren's momentum indicator (WAMI for short). That article discussed cycle analysis methods and the theory for WAMI optimization. This time, well apply this theory to several diverse markets and illustrate the art of trading with Fourier/WAMI optimization.
Fourier analysis and WAMI optimization are used to create momentum indicators that are tuned to each unique market so that momentum-based buy/sell signals are more consistently reliable for profitable trading. This can be achieved only when the method is familiar enough so that the optimized WAMI trading signals "look" right when applied to past market data. The art of WAMI-based trading lies in the application and iteration of the optimization process until the indicated trades on past market data give consistent, profitable results. This process can be illustrated by applying the optimization method to several markets in which it is not obvious how to optimize WAMI or how to customize the trading rules. This method is mastered by practice, not simply in understanding the principles or examples presented.