Trading Example

We include a real-world example to illustrate how the theoretical aspects are put together to form an effective trading tool.

The Instantaneous Trendline is a plot of the median daily price with the dominant cycle removed. This is accomplished by notch filtering the dominant cycle period and also filtering the higher frequency components. This process generates the smooth trendline in Figure 3. The Kalman filter closely follows the median price. When the Kalman filter line stays above the Instantaneous Trendline for more than a half dominant cycle you know you are in a trend. For example, this happens in the second week of September, and the mode shift is shown by the Mode Indicator in Subgraph 5. You know the trend is over when the Kalman filter line again touches the Instantaneous Trendline. This happens, for example, in the middle of December. In this case, the Mode Indicator drops to zero to indicator the return to the Cycle Mode.

The MESA Indicators Dominant Cycle measurement is shown in subgraph 4. The cycle length increases as time departs from the major turning point in August and then gradually decreases over the period of the Trend Mode. The cycle period is relatively constant, near a 18 bar period, over the duration of the Cycle Mode starting in December. The cycle period is used to compute the phase and the Sinewave Indicator, shown in subgraphs 3 and 2, respectively.

Note the clarity of the Sinewave Indicator signals when the market is in a Cycle Mode. You would not want to trade the Cycle Mode in November.

Now that you understand all the MESA Indicators signals, you may find it less distracting to remove the Phase and Dominant Cycle displays. Doing this, you may find the displays more pleasing and conducive to focusing on the trading signals rather than giving the full in-depth analysis capability.