Trading with MESA Indicators

MESA Indicators automatically adapt to current market conditions by using the MESA Indicators cycle measurement. The cycle measurement is best when the cycle length is constant. This means you have stationary data and well focused cycle energy. The phase display shows a good cycle when it has a composite constant rate change that is consistent with the rate change of phase produced by the measured dominant cycle.

The phase is also used to plot sinewaves from it in the Sinewave Indicator display segment. Crossing signals are produced by plotting one sinewave with a 45-degree phase lead, giving an early indication of a cyclic turning point, approximately one-eighth of a cycle early. The price bars are overlaid with two adaptive moving averages, having window lengths of one half and one full dominant cycle. The crossing of these adaptive moving averages signals the direction shift of the trend.

The following discussions are tips on how best to put them to work for you.

LOOK AT THE DOMINANT CYCLE

The dominant cycle plot is the best way to assess the validity of the cycle measurement. We urge caution using the cycle measurements when the cycle period is changing and is not stable at a single cycle period.

THE SINEWAVE INDICATOR GIVES THE EARLIEST SIGNAL

The Sinewave Indicator is designed to give a signal ahead of a cyclic turning point. The best signals occur when the indicator lines look similar to a sinewave at the time the crossing occurs. The Sinewave Indicator has an erratic pattern when the market is in a trend mode. Unlike most oscillators, the Sinewave tends not to produce false whipsaw signals.

The Sinewave Indicator signal is correlated with the dominant cycle phase. The cycle peak occurs when the phase is at 90 degrees. Therefore, the best entries for short positions should occur for the indicator when the phase is in the vicinity of 90 degrees. Similarly, the best entries for long positions should occur for the indicator when the phase is in the vicinity of 270 degrees, the cycle low point.

TRADE THE SINEWAVE INDICATOR AT ITS CROSSOVERS

The Indicator should look much like a sinewave at the time the trading signal is taken. A check on this condition is that signal crossover occurs near the 90% point for short entries (and long exits) and near the 10% point for long entries (and short exits).

Remember that the Sinewave Indicator gives signals that are approximately one-eighth of a cycle early. The period of the measured cycle determines how long you should wait to make your entry. If an 8 day cycle is measured, the turning point will likely be the next day, so you must make a quick decision. However, if the measured cycle is 40 days, the indicator will be 5 days early. In this case, you should ignore your urge to trade immediately.

CYCLES HAVE A CONSTANT RATE CHANGE OF PHASE

One definition of a cycle is a constant rate change of phase. That is, there are 360 degrees of phase in a cycle. A 10-day cycle, for example, changes phase at the rate of 36 degrees per day. If the phase does not change uniformly, this is an early indication that the market has switched into a trend mode. The direction of the trend is best shown by the relationship of the two cycle-tuned indicators -- the Instantaneous Trendline and the Kalman filter overlaid on the price bars.

TREND MODE TRADING

Generally, the direction of the trend is obvious. The Sinewave Indicator can complement trend mode trading by indicating the timing for adding to or lightening of positions.

An indication of a trend mode can be obtained by observing the relationship between the Instantaneous Trendline and the Kalman filter. In a cycle mode, the Kalman filter line will criss-cross the Instantaneous Trendline about every half cycle. If the Kalman filter line fails to cross the Instantaneous Trendline within a half dominant cycle (which can often be discerned much earlier when the Kalman filter line shows no hope of recrossing the Instantaneous Trendline), then the onset of a trend can be declared. The trend is over when the Kalman filter line again crosses through the Instantaneous Trendline.

TRADEABLE CYCLES

Always examine the amplitude of the measured cycle. It is possible that the cycle is stationary and highly focused (giving a high quality measurement), but the amplitude of the cycle is not large enough relative to the daily variations to realize a significant amount of profit from the cyclic move.