Can Trading Be Reduced To Cycles, Stresses And Vibrations?

[Editor's note: is a system for trading stocks and commodity futures. John Ehlers is a well-known commodities trader and the creator of MESA, a method of cycle analysis that he developed in the late 1970s. He is a recipient of the Market Technicians Association ( Charles H. Dow award and has written four books about trading, including Rocket Science for Traders. John is also the co-founder with Ric Way of StockSpotter and developer of its proprietary formulas and indicators — the subject of his interview with TalkMarkets contributor, Ilene Carrie.]*****

Ilene: John, it’s fascinating that you use cycles to predict the behavior of stocks. I understand it’s been a life long study for you and I don’t know the first thing about it. So, could you give me a quick introduction about how, and on what basis, your system predicts the movement of stocks?

John:  Cycles are everywhere in nature, from the four seasons, to the ringing of a bell, to the vibrations of a violin string, and so forth.  It is natural that we would have cycles in the market because there are plenty of stresses that can cause the prices to ring out.  They can vary with the presidential elections, seasonals, triple witching, or just the companies having to make their numbers on quarterly or monthly basis.  However I don’t imply causality, and view market cycles as ephemeral – they come and go with no apparent reason.

I effectively measure the general cycles without implying a cause. Once I measure the cycle and determine where the prices lie within that cycle, it is a matter of expecting that cycle to continue for a short while into the future that provides a high probability trade event.  Of course, I have developed a series of indicators and techniques whose express purpose is to located positions within the cycles and to forecast the nearterm variations.

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