mrtools wrote: Tue Aug 27, 2024 2:42 am
Precision Trend Analysis indicator
A New Way To Pinpoint Trend.
September 2024 edition of TASC's Traders' Tips showcases this new concept of identifying and seeing trends using digital signal processing principles by John Ehlers. The following description is summarized and written by Forex-station.
Concept of the Precision Trend Analysis indicator
Conventional trend-following indicators, including Moving Averages, function as
lowpass filters that allow low-frequency components of a dataset to pass through while eliminating high-frequency components. These lowpass filters are effective in maintaining long-term cycles within the data but diminish shorter cycles, resulting in an inherent lag that affects the promptness of trading signals.
John Ehlers introduces a novel method that integrates two
highpass filters of varying lengths to eliminate unwanted high-frequency components through a
cancellation process. Highpass filters exhibit minimal lag, resulting in a trend indicator that is highly sensitive to fluctuations in the price series, with its peaks and troughs closely mirroring those of the price data.
The indicator indicates an uptrend when its value is above the balance point, while a negative value signifies a downtrend.
John Ehlers subsequently illustrates that the rate of change (ROC) of a trend indicator can be utilized to identify the beginning of new trend movements. The ROC reaches zero at the peaks and troughs of the trend indicator. Consequently, when the ROC rises above zero, it indicates the initiation or persistence of an uptrend. Conversely, a drop of the ROC below zero signifies the initiation or continuation of a downtrend. It is important to note, however, that due to the ROC's inability to retain lower-frequency information, it may generate false trading signals in markets that are either moving sideways or consistently trending.
Calculation
The underlying mathematics of this indicator is based on the principles of digital filter design. Initially, a digital highpass filter is employed to reduce the influence of long cycles with periods exceeding a user-defined critical period:
- The default of
250 bars is approximately equivalent to one year for daily timeframe instruments such as stocks.
- Next, a highpass filter with a shorter duration of
40 bars, is applied.
The resulting difference between these two filters yields the trend indicator, which retains cyclic components ranging from 40 to 250 bars by default, while diminishing and removing others. The Rate of Change (ROC) reflects the scaled difference over one bar in the trend indicator.
This is a version of Ehlers precision trend analysis.
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