cycleMABands
The cycleMABands indicator makes the creation of offset moving average channels (aka Hurst Channels) a snap. The concept of using nested envelopes to help visualize the nature of price motion was popularized by JM Hurst in his 1970 book entitled The Magic of Stock Transaction Timing. He also authored a full-length course on cyclical analysis and on how to apply it to actual trading.
The envelopes, as outlined by Hurst, were hand drawn but they can be closely approximated (not to mention more easily constructed) using offset double-smoothed moving average channels. As the name suggests, however, offset moving average channels are 'offset' a certain number of bars back on the chart. Traditionally, the problem has been in finding suitable algorithms to extend the offset channels up to the current price and beyond, while preserving the overall integrity of the channel construct. Several Hurst channel implementations are available to traders but most are based on some form of polynomial regression which can produce undesirable results at times. Our implementation is based on a form of spectral analysis called Linear Prediction and it tends to create much smoother (and more accurate) channel projections that can be extrapolated several cycles into the future.
Usage
Correct application of the cycleMABands indicator has a lot to do with understanding Hurst's methodology, and there is much more to Hurst's methodology than the concept of price envelopes alone. Even an overview of Hurst's methods is beyond the scope of this document and will not be attempted. If you are at all interested in Hurst's work, we encourage you to get your hands on a copy of his above-mentioned book. It will probably take several reads before it starts to sink in but, it contains useful information and it is worth the effort. By the same token, if you choose to forego this endeavor and pass on the use of the cycleMABands indicator, it will not detract from or diminish in any way the usefulness of the remaining cyclePack indicators. We have provided the cycleMABands indicator as a tool for those who are interested in Hurst's approach but it's use is certainly not a requirement.
That being said, the usefulness of moving averages (and channels constructed from Moving Averages) lies in the fact that they lag the price data by 1/2 of their span. When plotted using the correct offset (e.g., 1/2 of the span or period), they present a time synchronized, smooth version of the data that can be used to make market timing decisions.
A practical approach would be to use cycleAnalyzer to identify a strong short-term and a strong longer-term cyclical component in the security you are charting. Then load two copies of the cycleMABands indicator and create two channels. The first channel would have a MA Period of 1/2 of the short-term cycle you identified using cycleAnalyzer and would be offset by 1/2 of this MA Period. You would then adjust the Band Pct setting until you have an envelope that contains roughly 95% of the most recent price action. Then you would configure the second copy of cycleMABands in the same fashion but you would use the longer-term cycle (that you identified with cycleAnalyzer) to set the parameters. Again, you would set the MA Period to 1/2 of the length of the cycle and the MA Offset to 1/2 of the MA Period. Lastly, you would adjust the Band Pct setting so that this new channel contains roughly 95% of the first channel you constructed. Note that for this second copy of cycleMABands you will probably want to turn off the Basis Line display, disable the on-screen menu button, and select a different set of colors. All of this can be accomplished from the cycleMABands script menu.
When you are finished you will have a channel within a channel and the short-term as well as longer-term cyclical price motion should become quite clear. The price channels help you to visualize the relationship between the shorter-term price action and the longer-term price action. In the INTC example above, we can project that the shorter-term cycle will reach a bottom at some point in mid-to-late May. At the same time, the longer-term channel has begun to turn up. This is a very basic application of the Hurst methodology.
Data Requirements
If you run into problems using cycleMABands, please read this section carefully. When using cycleMABands you select a window size (i.e., Data Window in the menu)...this represents the number of bars of moving average data it will collect in order to make the projection. So, for example, if you have 300 bars of data in your chart and you have selected a Data Window of 256 you might think that your 300 bars should be adequate. However if you set your MA Period to 100 and your MA Offset to 51 then we would not have any moving average data until the 75th bar, which means that we would have only 225 bars of moving average data....not enough for the indicator to make a projection based on a Data Window size of 256. So the long and short of it is....you can never have too much data in your chart when using cycleMABands. Our recommendation would be for you to make good use of the eSignal Time Template feature and create Time Template entries for all of the bar intervals that you regularly use....and set the number of bars to preload to a large number, like 1000 bars. This will ensure that cycleMABands always has enough moving average values to populate the data window and perform the projection calculations.
Operational Highlights
cycleMABands works on all time frames from 1-minute bars to monthly bars. (Note: Because of the calculations required to update the channel on each new bar, using cycleMABands at intervals below 1-min is not recommended).
cycleMABands uses Linear Prediction algorithms to extend the price channels up to the current price and beyond. Linear Prediction tends to create much more accurate channel projections than the more commonly used curve-fitting approaches.
cycleMABands will update the channel as well as the projection on each new bar and is, therefore, suitable for use in realtime charts.
cycleMABands can be used to create Hurst-type channels. It can also be used to create 'regular' moving averages that are projected into the future.
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