The Finance Book Club

Trade 4 & 5:

4 I think could definitely have been entered earlier, in fact just as soon as price closed above TS.

Trade 5 was opened and closed basically the same day. I assume it's because of rule 10 but on my chart price is never > 200 pips distant from the TS.
In any case, they are both clearly valid entries.

Trade 6 & 7: I see no problems with a 2007.02.22 entry for trade 6.
Similarly I don't understand why trade 7 was delayed and not entered on 2007.03.26 and again on 2007.04.10. Both periods show valid entries. Unless the problem is the TS is too flat?


Trade 8:
The only bearish trade. In fact I see TS above KS here which makes it a violation of 2 and 9. Also, to me it seems like 2008.08.06 is the perfect entry for a short. Further entries from that date are then too far from the TS or KS. So that explains somewhat, the big period of inactivity in August and September. So a bit of a question mark there, but I don't think it's an attempt to deceive, probably just broker data variation?

MP's rules seem to be consistently followed, but now I would like to see if I can find any places where an entry could have been made according to the rules but that would have resulted in a loss. I've pointed to a few places where it seems to me an entry would have been valid but those would have been winning trades anyway.

The logical place to begin searching is during the periods where PIERSE generated losses. Between about Dec 2007-Feb 2008 and again from May - July 2008.

A big blank range.

My eye immediately alights upon 2007.11.23. The TS pointing up, the KS is pointing up. The Chikou is pointing up into empty space. The Kumo is yellow 26 periods in the future. Price is ~90 pips from the TS and about 290 pips from the KS. Now that's pretty close to 300 so maybe MP's closing price was >300? But then 2007.11.27 is only about 260 pips away from KS. I can't see any other reason not to take this trade, can you?

This is a big for me. That seems like it should have been a long trade, and a loss, just like PIERSE had. Unless maybe, the problem is the TS is flat on the second day?
Here is a closeup and both trade candidates highlighted with gold vertical lines.

Another one on 2008.01.14

TS is up, KS is up, price is above the cloud, it is bullish in the future, the Chikou is above price and pointing up, at least as much as some past trades anyway. Distance to nearest support is >50 pips but distance from TS is < 200 and from KS is < 300. This is a valid entry! If MP had the foresight not to enter long on this day, it surely depends on something other than his stated system rules.

And one more on 2008.02.01
If the entry on 02.04 is no good because KS is flat, the one before it is surely OK, as both TS and KS are up, even if TS only crossed over today. The distances to price are all within the correct ranges. Basically MP has somehow managed to avoid the same trades that PIERSE took, apart from one, which is the only thing I can say for sure is a definite improvement on PIERSE.

Since the system requires the Chikou to be beneath the cloud and/or price (I think - not sure if MP states this explicitly) it's not possible for this system to take any short trades during this ranging period. It might be worth adding a 'long period' MA to PIERSE and then it truly is a MA crossover system, although this would filter out some winning trades too. Tradeoffs- almost impossible to avoid them in any form of trading, which is likely the origin of the word, come to think of it.

In any case, I am so far highly suspicious about MP's excellent results so far.

I think I can only find one on 2008.07.15

So it's still possible that MP's system is slightly more discerning than PIERSE, but its profitability is looking worse every time I check.

Ok, let's wrap this up with a final check of 2012-2013 and a template file.

2012.01.01 - 2013.12.31
This is the period I'll be examining, but without the benefit of MP's discretionary skill. Just the system rules as I understand them.

The results are surprising and therefore interesting!

Over 2 years I find about 14 trades using MP's system rules, of which there are 6 losses. So the loss ratio has worsened in this choppy ranging price action, but surprisingly, the system remains profitable with approximately 1000 pips gained after losses are subtracted. This is not that much worse than what MP achieved during a trendy couple of years!

Just in case that seems a little prosaic to you, let's see how PEIRSE performs over the same period.

Whenever you see this much magenta on one of my charts, you know it's bad news.

29 trades, of which 19 were losses. I did not even bother adding up the totals as it's surely negative. The only way to make PEIRSE work in this environment is to change its period length or to trade a different timeframe.

This is why I rarely trade MA systems because the only way they can work long-term in various types of markets is if you are constantly adjusting their settings. There are surely ways to do that, and it might be an interesting experiment. However, remarkably, MP's system seems to be the much better all-weather system between the two, without needing any setting adjustments.

Conclusion
It means that, contrary to my initial impressions, IKH is not like any MA that I've ever tested. It seems the indicator gave reliable signals in two drastically different price regimes. That's the first time I've ever seen any indicator do that. This makes it worthy of more study. It could also be that some of MP's extra rules, especially the ones about exits helped, but that also makes them worthy of additional study. I've attached my templates for both tests if you'd like to use that as a starting point.

I would definitely consider adding this system to the list of 'things that work' and it upgrades this little book, with its many flaws, that I've already described, to something notable. I'm glad I kept an open mind and didn't reject it as more TA silliness. Of course, this little test is hardly definitive, not enough data, so don't go trading it on a live account without doing some of your own research. Feel free to report back here if you do. It would be interesting to find out if this works on lower TF (probably not as well) and if it can be automated to some extent.

It's also interesting to consider why this works so sell. One reason could be the nature of the Chikou span and Kumo cloud - being shifted in phase by 26 periods they take advantage of some of the known cyclicality in price. This is probably the most powerful idea in JM Hurst's cycles theory work where he calls it the 'forward line of demarcation'. I assumed he'd ripped this idea off Dewey, but maybe it was Dewey who ripped off Goichi Hosada first?
Perhaps not. I may be falsely remembering.

It's the nature of trading secrets, it seems, steal (or borrow) and hide your sources. @ParisBoy might know the whole history if anyone does.

Also it's possible that these concepts were independently discovered by each new student of cycles/price action as they are not so complex. I should perhaps not be so flippant about the great technical analysts as we are after all, standing on their shoulders.

One additional addendum before I move on to the next book. Rule 10 that requires a trade to basically break-even after reaching 200 pips almost always overrides rule 11 which tightens the stop loss to the KS after a 300 pip profit. This is because it's rare for any trend not to produce a flat TS at some point shortly after moving that far. It would be interesting to see how this performs using only rule 10 or rule 11, but not both.

The next book is 'The City: London and the Global Power of Finance'.

After reading about how much of Russia's oligarchy is hiding in London, it might offer some interesting perspective on the current news, or not, but at least it will be a nice change of pace after all this technical analysis.

Hi Clemmo17 have you a reference where Edward Dewey had the idea of the Future Line of Demarcation (FLD) ?

Yes I thought I did, (under another name) but I could not find it when I wrote my original post. It was a variation of phasing a cycle in order to approximate the anticipated future cycle direction. I came across it while looking at articles on the archived website of the Foundation for the Study of Cycles or possibly in 'The Case for Cycles'. But also, I may be imagining things.

I am curious if you know if the idea of shifting a moving average back or forward in time is an invention of Hosoda's or is it more ancient?

Hi Clemmo . No idea. I would be interested if you find the proof for Deweey.

I have some archives of the FSC. and the books from Dewey. I will comb them.

Anyway it is obvious ( I wrote it already) that Jim Hurst never paid his dues to the researchers of the FSC. Hurst is not "the father of Cyclic Analysis". Cyclic Analysis has many fathers.

As for Hosoda nobody knows because nobody can speak japanese and can go to the source. All IKH books are just decalcomany of Manesh Patel. No more. Have you noticed that nobody has improved , deepened IKH.

By the way have you something about Jim Tillman who was a member of the FSC Board. Tillman published Cycletrend newsletter. But I can not find archives

The City
Chapter 1 - Britain, Finance and the World Economy

1. Norfield has a 20 year career in finance
2. ‘Where is Value’ is the eternal question despite faster computers and more detailed displays and graphics
3. The focus is on making a good bet or at least not getting caught out
4. The casino analogy is misleading as the The City is a ‘nerve centre’ of world finance
5. The book is about how the global financial system works and to whose benefit
6. The City plays a role for British capitalism
   1. Services a global system
   2. Takes control of world’s resources using financial operations
   3. Generates dealing revenue for the Brit economy
   4. Centralises economic power

   
   

7. Britain punches far above its weight in terms of global investment in other countries - with investments nearing $2T it is the second largest holder of foreign stock investments
8. Capitalism and finance are inseparable; you cannot excise one and have the other survive better off
9. “access to finance both reflects economic power and is a means of retaining that power.”
10. There is a hierarchy of major players - not just companies but entire countries
11. Britain retains its imperial power through economic power, not so much political power
12. The USA compensates for its industrial inadequacy by using its financial power
13. The USA’s continued position as a global hegemon is not assured, though many believe it to be
14. China is the main rival
15. The New Development Bank - BRICS (Brazil, Russia, India, China, South Africa) bank
16. China’s stock exchanges are already second largest in the world
17. The financial system is the means by which the corporations and governments of the rich countries control the world’s resources.
18. This book is much more academic than I expected. I was hoping for some lighter reading. Sigh.

Chapter 2 - The Anglo American system

1. 1925 - Churchill vs. John Maynard Keynes
   1. Churchill wants to return the sterling to the gold standard
   2. Keynes is opposed to the chosen rate
   3. Keynes believed the higher rate will be a domestic industry problem (coal)
   4. Churchill made the decision because they were worried about US ascendance
   5. ‘If we had not taken this action, the whole of the rest of the British Empire would have taken it without us, and it would have come to a gold standard, not on the basis of the pound sterling, but a gold standard of the dollar.’
   6. large outflows of gold led to downward pressure on sterling’s exchange rate and the gold parity had to be abandoned in 1931

   
   

2. Bretton Woods signalled the transition from the broken, pre-war and formerly British-led system to one now dominated by the US.
3. Morgenthau, the treasury secretary wanted to ensure US dominance and was able to get the IMF and World Bank based in Washington, DC.
4. Britain realised its secondary position in world affairs after the Suez Crisis of 1956
   1. International investors began to sell Sterling after US opposition to the Anglo-French adventure
   2. Britain did not have the funds to defend the pound
   3. Britain had to back down

   
   

5. Norfield takes pains to point out that the City is a major financial centre, not a satellite of the USA, but methinks he protesteth too much
6. The US system is more constrained by regulations
7. There is a rivalry in the Anglo-American alliance, with the US seeking to knock the Brits off their pedestal, but the Brits obtaining some concessions, both military and economic
8. Keynes had suggested a world currency ‘bancor’, but this was rejected by the US
9. Britain’s imperialism was at first opposed by the US but then as the ‘red menace’ became more of an issue it softened its stance and allowed Britain to use Indian troops to restore its Asian colonies
   1. “More troublesome for the British Empire in these early postwar years were the Indian nationalists who wondered how their aim of achieving ‘dominion status’, or securing some independence from Britain, was consistent with Britain also using Indian troops to restore Europe’s colonial empires. It took a peculiarly British audacity to have the gall to use a recently defeated imperialist enemy alongside its own colonial troops to fight anti-colonial popular movements.”

   
   

10. London’s location between New York and Asia is one reason that it has retained its unique advantage. It can deal with Asia in the morning and the Americas in the afternoon, while dealing with Europe all day long.
11. A fractured US banking system, the move from the gold standard, dissolution of Bretton Woods, and ‘Regulation Q’ that prevented US banks from competing for funds, all contributed to the rise of London.
12. The Eurodollar commercial paper market
    1. Less regulated
    2. Outside US structures
    3. Useful for regulatory arbitrage
    4. Useful for big international corporations with credit needs larger than can be provided by domestic banking
    5. Helped close the gap between balance of payments and the British trade deficit
    6. “The euromarkets allowed the growth of City business outside of its previous focus on sterling, which had become a dead end. The new market was one step on from the City’s use of other people’s money to turn a profit – it was now specialising in using other countries’ currencies too, particularly the US dollar! In doing so, it was expanding its role both for British and for international capitalist companies.”
    7. “The British ruling class had honed a particular skill, learned from the experience of generations, of knowing when to upset, threaten or kill ‘foreign Johnnies’, and when to let discretion be the better part of valour and instead do a deal with them, especially when that deal was clearly in British interests.”
    8. There is a stated tacit agreement that regulations will not be changed ‘without good reason and consultation’
    9. The euromarkets were the first major means by which flows of finance found ways around official national regulations after 1945, but, as the evidence shows, this was encouraged by the UK authorities and was far from being impeded by the US administration.

    
    

Indeed.
I am a complete IKH novice, so I had no idea. I sometimes see mentions of it on YouTube. What is interesting is it seems to me there is this pattern of a 'primary source' that is shadowy/shrouded/hidden/obscure or incomplete - a foreign language or incomplete notebook, etc.

Then there emerges a 'disciple' who is the driver of the legend - the revealer of the source material, the interpreter and the popularizer. It's almost like a legend cannot spring from the author themselves because it will seem too much like self-promotion, but if someone else vouches for it - then there must be value there! Hurst has Millard and Hickson, Elliott had Prechter, Gann now has too many disciples to count. I'm sure there are other examples.
I will check my archives and let you know if I find something.

Thank you Clemmo.

IKH is frozen since the first book of Manesh Patel.

About the relationship beteen IKH and FLD I will post later on your thread. I have done it in french already. I need to check my files

Below is an explanation of the FLD (Future Line of Demarcation) To make everyone understand how it works I will republish here the explanation of FLD (where prices are projected into the FUTURE) then apply it in the case where prices are projected into the PAST.

Suppose that the prices of an entity (stock, index, ETF, commodity, Forex pair etc) can be represented by a sinewave, what would that give? This would give this:

Let's say the sinewave you see below is the SP 500 curve.

Let's assume that the "span" of the SP 500 represented by the black sinewave is 52 days (a full revolution in 52 days).

Move Price Action to the right (in the FUTURE) by half the span (52/2) = 26 days. You just created the FLD 52 days. Simple isn't it?

In mathematics this is called a TRANSLATION.

The ICHIMOKU System translate in the FUTURE the 52-day Moving Average of Price Action, of 26 days or half of his "span".

A moving average is what is called a "LOW PASS FILTER".

It is a filter that eliminates or reduces low frequencies.

The MA 52

- completely removes the 52 Time Units cycle
- very strongly crushes cycles of span less than 52 Time Units
- allows cycles longer than 52 days to go through, the longer the duration of the cycles is longer than 52 Time Unitss, the more the influence of these cycles is found in the Moving Average.

The Chart shows you the evolution of the price (represented by the black sinewave) and the FLD some time after.

As the curve is sinusoidal, the downward price curve intersects the upward FLD curve (which is a price replica translated X/2 days into the future) IN THE MIDDLE of its development.

This is what makes possible to generate a price projection (same principle as for the crossing of the Centered Moving Averages with the price curve.)

If we consider the CHIKOU we just have to reverse the last chart and to consider that the dotted curve marked FLD represents the current closing prices and the black curve in solid line the CHIKOU (Price translated in the past of 26 Time Unit).

Using the ICHIMOKU system supposes that the value being studied follows a 52 Time Units cycle.

Thank you, maestro.

I presume this means that if we can confidently find a more accurate cyclical period for any security under analysis we can possibly improve the performance of the indicator?

Chapter 3 - Finance and the Major Powers

Before I continue I feel like I should say a few words about why I would continue with a book this dry and dull. Well, when I began this journey of learning to trade, (how to make money without a boss) I was also determined to learn everything I could about money. You could say the two journeys are inseparable. I did not even begin to suspect that money (and economics) was such a complicated subject and that it had so much history and influence on our whole world. This book, although tough to get through, and difficult to summarize well, is a very detailed explanation of how capital works in the world. It's written from a Marxist perspective, which makes it critical of the subject, but also, so far it seems highly accurate and factual. Sadly, the price of such detail is a lot of tricky decisions about what to include or exclude.

Also, recall what I said about learning the history of money. History rhymes. Some day you may be able to take advantage of a situation that is similar to one that you didn't live through, but you learned about in a book.

1. 1970s postwar boom ends and a recession begins
2. International financial trading accelerates as a response
3. 1979 Conservative gov abolishes exchange controls to increase income from foreign investments (Thatcher)
4. August 1971 US formally abandons its obligation to exchange US$ for gold at $35/oz.
5. Vietnam spending had reduced gold reserves
6. Despite flows of international investment funds away from the dollar it remained it remained the international measure for value
7. 1973 OPEC begins increasing oil prices
8. US treasury secretary William Simon visited Saudi monetary authority in July 1974 to sell US Treasury securities, weapons contracts, and US military protection
9. This kept the price of oil denominated in USD
10. Rising oil prices and importer deficits vs OPEC contribute to greater volume of international financial flows in the 1970s
11. 1974-1979 OPEC countries put a cumulative $84B into eurocurrency bank deposits, expanding the international credit system
12. Treaty of Rome signatories building a regional financial system that becomes the ERM (exchange rate mechanism)
13. 1970 the Heath gov begins negotiation to join the EEC, Britain becomes a member 1973
14. This was motivated by economic problems that eventually forced the UK to take on an IMF loan(s)
15. The UK generally chose to maintain its US alliance rather than strengthen European ties and this was reflected in its trading patterns
16. 1992 the Maastricht treaty turns the EEC into the EU; Britain chooses to remain aloof
17. This is partly due to the Sterling crisis of 1990 (see my notes about George Soros and the ERM)
18. The UK gets little support from other countries like Germany for its troubles partly as a result of its reluctance to be fully part of the EU experiment
19. And Britain was reluctant to board a train that had Germany as its conductor
20. 1997 the Labour government devises ‘5 Economic Tests’ for deciding to join the EMU
21. However in reality these were a sidestepping of having to choose between Europe or US
22. EMU membership would have threatened the financial dimension of British power
23. Outside the EMU the UK is free to decide on its own rescue operations during a financial crisis (like in 2008)
24. In the 1980s other countries begin to develop their own international financial markets and the City’s leading position began to be threatened. In response, the government concern was improving competitiveness
    1. This led to the ‘Big Bang’ reforms of 1986
    2. Ousting the financial cartel that had been in place for decades
    3. Made it easier for financial companies to join the London Stock Exchange (LSE)
    4. Abolished fixed commissions
    5. Ended division of labour between ‘jobbers’ and brokers
    6. Jobbers - advance money to hold shares for sale
    7. Brokers - match buyers and sellers for a fee

25. The Big Bang leads to the influx of many foreign financial companies who faced restrictions at home
26. 1986 the EU follows suit and leads to the single market in 1992
27. FX trading share in London increases, despite the volume of trading in sterling being on the fourth largest globally
28. This was a sign that the City had consolidated its position as a main centre of financial dealing, that didn’t necessarily related to the UK domestic economy, or depend on the use of sterling
29. The nature of the European union meant that it was less likely to establish a single dominant centre of finance like the one in London

Clemmo17 I never used IHK . And every time I have expressed such ideas even very diplomatically I was shot on sight by IHK believers !

@clemmo17, you sir/madam are doing the Lord;s work! Tedious as it is. Thank you for your service!