Measuring Market Cycles by John F. Ehlers
If you haven’t given much thought to why certain parameters are used in indicators, you may be interested to know that it has a lot to do with measured cycle periods. Here’s how you can use these measured periods and apply them to your indicators.
Why does the relative strength index (RSI) use 14 bars in its calculation? That was the question I asked when I first used technical analysis. The best answer my broker could give me was “because Welles Wilder says so.” You have no idea how dissatisfying that answer is to an engineer! So I began my quest for a better explanation. I discovered that the correct answer to this question is about measuring the cycle periods that are obvious in the data, and then tuning indicators to the measured cycle periods. In this article, I will show you measured cycles in the equity indexes that occurred in 2015 and give some tips on how to use these measurements in your indicators. I’ll also give some advice on how to measure the cycle periods yourself...