SwamiCharts Convolution by John F Ehlers and Rick Way
One of the major objectives of technical analysis is to decisively identify a major reversal so that we can trade the market primarily in the direction of the ensuing trend. SwamiCharts convolution is just the ticket to meet that objective.
IN mathematics jargon, “convolution” is an operation on two functions that produces a third function. Convolution is similar to cross-correlation between the two input functions — with a twist. An anachronistic term for convolution is faltung, which means “folding” in German. It is this concept that makes convolution useful for trading. Here, we will spare you the details of the mathematics and jump from the theoretical concept to useful trading examples.
Consider what happens at an idealized market bottom. The prices decrease linearly until the bottom is reached and then increase linearly after the bottom has occurred. If we fold these idealized prices about the market bottom, the two price segments are perfectly correlated. We have cross-correlated two market segments that have been folded at the horizontal point of the market bottom. This correlation only occurs at the idealized market bottom that, in fact, establishes the need for prefiltering before the correlation is calculated so that a relatively high correlation can be achieved using real data.