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Christopher Grafton \'Mastering Hurst Cycle Analysis\' Interview

Cover of  by Christopher Grafton

1. Who are you?

I have worked on the Japanese equity sales desks at a couple of different investment banks, both in London and Tokyo. I was also an analyst and a trader at a small cap value hedge fund based in London. My connection with the Japanese stock market is that I lived in Japan for over 12 years and speak the language, but I have also been involved in global special situations and risk arbitrage. I am a technical analyst by training and hold the Market Technicians Association?s CMT designation. Next year I also expect to have the Master of Financial Technical Analysis (MFTA) designation.

My current project is running an FSA authorised market analysis service which is due to launch in January 2012 at . This is aimed at institutional investors and again looks primarily at the Japanese market, although there is enough Asian read across and global macro for it to also appeal to a wider audience. In addition, I am an active programmer and most recently built a grey box trading system for a major US hedge fund. This has already had a strong impact on the fund?s performance and has enabled them to significantly increase their AUM.

2. What is your new book ?Mastering Hurst Cycle Analysis? about?

Mastering Hurst Cycle analysis is effectively a manual on how to perform this particular style of technical analysis. The basic premise of the book is that cycles exist in freely traded financial markets and that these cycles share the same properties as those found in nature. As such, early on the book I explain the physical properties of all cycles and then carry these principals over to the markets. That there are cycles in market data is nothing new, but Hurst?s system allows us to identify them and forecast future price action.

The book is fairly involved and the methodology might seem difficult at first, but once you get the hang of it, it opens your eyes to a whole new way of viewing the markets. More to the point, an experienced Hurst analyst can achieve spectacular accuracy. So I would say that the book, in a way, is all about drawing back the curtain on the underlying mechanics of price action in the market.

3. Why did Hurst?s original system need updating?

Hurst was an aeronautical engineer by profession and sought to apply a rigorous mathematical approach to market analysis. He put together a course for a limited audience in the 1970s, but back then of course PCs and technical trading software were unavailable. As such the original work is more or less manual and paper based. I think very few traders and analysts today would be willing to go through an analysis in the way Hurst prescribed. Additionally, the original material is quite dense and abstruse and as such I think only a few dedicated souls would be prepared to approach the subject. What I have tried to do is bring the material into the modern idiom, make it current and of course provide the code required to perform analysis on a PC.

4. Why did you write this book?

I have long thought that traditional technical analysis has limitations. It can often be quite subjective and rules are often scant. What this means is that results can be pretty mixed. Before I studied Hurst, I was a keen student of Elliott Wave theory. What I like about Elliott Wave is that there are rules and guidelines but more importantly there is structure and context. Hurst cycle analysis shares the same concept of market structure and it has well defined rules. This takes a lot of the guess work out of analysis, but of course it requires experience to get results. I wrote this book not only to help people see the market in cyclic terms but also to be able to master the techniques of cycle analysis.

5. Who is your book aimed at?

Primarily technical analysts who are looking for superior results and are prepared to put in the extra work. Anyone looking for quick superficial answers, for example those who are drawn to statements like ? the 200 day moving average has just broken? or ?RSI is diverging with price? and so on, probably will not be the target market. To my way of thinking, someone who has mastered Elliott Wave for example and wants an add on would be ideal.

6. Your book includes code for trading indicators. How will these indicators help the reader?

They will help, because you will be able to run the code and put together a full analysis in about 30 minutes. Put it this way, if you do not use the code, you will need a lot of chart paper, a lot of pencils and a lot of patience.

7. Which indicators do you find most useful when trading?

I like to try to have a very good sense of where price is in the overall structure before I start using indicators. When I think I know where I am, usually through a combination of Hurst and Elliott, I use three indicators. I am a big fan of RSI and use a lot of advanced techniques, negative and positive reversals, hidden signals, RSI derivative and so on. I have also started getting some good results with one of Gann?s original ideas, the Profit Float Indicator, whereby volume is compared to the number of shares available to trade. I also use a proprietary indicator which is a fairly involved combination of smoothed short RSI, Williams%R and Stochastics, which does a great job of calling turns.

8. What in particular is it that attracts you to Japanese equities?

Nothing in particular other than I am familiar with the market, what drives it, the companies and how they stand in relation to their global and regional peers and supply chain. I am just as happy looking at commodities, currencies and other global equities.

9. What other authors do you admire?

I like Robert Prechter very much, he is an original thinker and breaks a lot of new ground. I think Jeremy Du Plessis?s work on Point and Figure work is very clear. Thomas Stridsman has written a very good book on systems testing. Tony Plummer is always worth reading as is John Ehlers. I would say my favourite books are those that get to the point and don?t take 120 pages rehashing the basics of technical analysis.

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