MASTERING HURST CYCLE ANALYSIS
BY CHRISTOPHER GRAFTON, CMT
REVIEWED BY MIKE CARR, CMT
Hurst?s cycle work is one of the pillars of technical analysis, but has been largely inaccessible and unknown to many traders. J. M. Hurst was a rocket scientist, an aerospace engineer in the 1960s.
He applied his math and engineering skills to the stock market and offered a glimpse into his work with a short book called ?The Profit Magic of Stock Transaction Timing? (1970, Traders Press). Hurst also produced a detailed course that he published in the early 1970s and then Hurst seemed to disappear.
The ten volumes that made up the original Cycles Trading and Training Course was located by Traders Press and is now available for traders looking at an effective way to apply cycle analysis to their work.
Christopher Grafton has delivered a comprehensive summary of Hurst?s work and expanded on the analysis techniques. He also brings Hurst?s work into the twenty first century and provides an appendix with the complete code for applying Hurst cycle analysis using Updata or TradeStation.
In the first chapter of Mastering Hurst Cycle Analysis, Grafton ensures that the concepts of cycles are well defined. He explains Hurst?s Principles of Cyclicality:
- Harmonicity: cycles typically tend to be related to one another by
multiples of two, although in certain cases by a multiple of three.
- Synchronicity: cycle lows tend to converge: in other words the
trough of a long cycle will coincide with the trough of all shorter
component cycles. Although, apart from commodities, this is not
the case for cycle peaks, which tend to be more dispersed.
- Nominality: there is one more or less uniform set of cycles from
very long to very short.
- Variation: deviation from the norm is to be expected: cycle periods
and amplitudes vary over time.
- Commonality: these principles are applicable to cycles in all markets
across the entire price history.
Grafton makes a very important point, that, ?It is worth remembering here that although Hurst used the word ?principle? he did not mean ?physical law?¦, like the law of gravity or the law of thermodynamics, but rather ?strong tendency?. Cycles can be swamped or summed, for example, and Grafton makes these points with rich examples.
Each of Hurst?s Principles is also expanded upon with examples and diagrams that ensure anyone can grasp the important ideas that will be applied to the markets later. Cycles are a topic that normally requires a comprehension of math, but Grafton?s writing and illustrations make the topic understandable even to those with no advanced math background. By applying the code that is required to implement the ideas, it is even possible to trade based upon these ideas without needing any understanding of cycles except the ability to read a chart.
After a great deal of study, Hurst developed the nominal model which highlighted the most important cycles in the market.
Many traders want to believe that cycles can unlock the ultimate key to understanding and forecasting the markets. Grafton cautions readers of the limitations and hints at the amount of work this technique requires to implement successfully at the end of the first chapter, ?Hurst analysis is a system of tools: we do not just blindly rely on individual signals, but combine empirically derived techniques with sound underlying logic to build up evidence to forecast future cyclic action.?
In subsequent chapters, he details the tools needed to create forecasts based on Hurst Cycle Analysis. Each tool is fully explained and a number of examples are provided on charts. Two of the most important tools are valid trend lines and displaced cycles which Hurst called the Future Line of Demarcation.
Valid trend lines are more objective than conventional trend lines because they follow specific rules. Different analysts will be able to find different trend lines on a chart using the traditional approach since trend lines are actually one of the more subjective techniques of technical analysis. Hurst defined specific rules for drawing trend lines based on cycles, and this makes it possible to spot more significant trends in the market and have an objective method to know which trend line breaks are important.
Grafton points out that the displaced cycle is one of the most original ideas in the Hurst tool kit and may be among the most useful indicators devised by Hurst. He explains the concept:
'This is a line drawn in future time that precisely tracks a particular cycle, demarcating an imaginary forward boundary. In other words it is a duplicate cycle displaced to the right of the original. The interaction of the price cycle and the displaced cycle provides us with valuable insight not only into the base cycle, but also into the overall cyclic condition of the market.'
Again, examples and code are provided to make the ideas understandable and easily implemented.
Those ideas, understandable and easily implemented, define Grafton?s work. The reader will be able to trade on Hurst?s groundbreaking work, which Grafton shows has stood the test time. In other sections of the book, Grafton shows how Hurst cycle analysis can be confirmed with other market techniques, specifically RSI and Elliott Wave. He notes that ?RSI is a true and representative measure of momentum and Elliott addresses market rhythm and structure. An understanding of both will help take your cycle analysis to the next level.?
This book takes cycle analysis into the modern trading day, updating Hurst?s classic work from the 1960s and 1970s with technology available today. Grafton has done a commendable job both in preserving market history and providing a useful guide for traders.
Christopher Grafton, CMT, has worked on Japanese equity sales desks at various investment banks in London and Tokyo. He was also an analyst and a trader at a small cap value hedge fund based in London. He is working to complete the Master of Financial Technical Analysis (MFTA) designation. His current project is running a market analysis service which is due to launch in January 2012 at www.vectisma.com. He also recently built a grey box trading system for a major US hedge fund.