Decoding the Hidden Market Rhythm Part 2: Metonic Cycles by Lars von Thienen
A dynamic approach approach to identify and trade trade cycles that influence financial markets
www.whentotrade.com
Decoding the Hidden Market Rhythm – Second Edition A dynamic approach to identify and trade cycles that influence financial markets Part 2: Metonic Cycles (Release 2014) All Rights Reserved. © Copyright 2010-2014 Lars von Thienen / www.whentotrade.com All materials of this book, including, without limitation, text, software, scripts, illustrations and video are copyrighted intellectual property. Everything presented in this book is considered licensed to you for your personal, noncommercial home use only. You're not allowed to redistribute or sell the material or convert it to any other form that people can use. You may not copy, reproduce, republish, upload, post, transmit or distribute this material in any way or for any other purpose unless you get the written permission from the author first. This book is designed to help readers obtain trading education. It discusses ways to trade the markets using cycle analysis in the decision process. There are no warranties implied. This book makes no guarantee that that you will make money trading any market. The past performance of any shown trading system or methodology is not necessarily indicative of future results. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Trading involves the risk of loss. Please consider carefully which trading instruments are appropriate to your financial situation. The risk of loss in trading can be substantial. However, the ability to assess risk is vital to a trader's survival. Conversely, without risk there is no profit either. www.whentotrade.com
This book stands in contradiction to a quote from the world’s bestselling finance book.
“The past history of stock prices cannot be used to predict the future in any meaningful way. Technical strategies are usually amusing but of no real value. A simple policy of buying and holding will be at least as good as any technical procedure.”
Professor Burton Malkiel Proponent of the efficient market hypothesis “A Random Walk Down Wall Street” 2011, 10th Edition, page 161
Forward: Second Edition – Part 2: Metonic Cycles This second edition of “Decoding The Hidden Market Rhythm” comes in three parts with extended content. Part 1 is about “Dynamic Cycles”, Part 2 about “Metonic Cycles” and Part 3 about “Genetic Algorithm & Cycles”. The concepts presented can be replicated using the Standalone WTT Charting Module or the Wave59 Cycles Plug-In. The original cycles tools were applied prior to the first release in 2010 and they remain the same in this second release. Additional examples have been added for explanatory and demonstration purposes. The additional content can also be reviewed in the video library (“Academy”) on the WhenToTrade Website. After the initial release in 2010, the standalone WTT Charting Module was introduced in 2012 and it marked a significant milestone. It enabled the implementation of cycle analysis supplementary tools. A new genetic algorithm was implemented as a precursor to the next dimension of cyclic analysis. Researchers can now advance cycle research and push the boundaries. New tools, such as the Genetic Algorithm, is already available within the WTT Charting Module for our community. The second part “Metonic Cycles” introduces a non-linear predictive cycles model. Lars von Thienen, February 2014 www.whentotrade.com
Contents Section I - Preface and Basic Assumptions ....................................................... 11 1. Natural Forces ............................................................................................ 13 1.1 Mental warm-up session: W.D. Gann ...................................................... 14 1.2 Basic assumptions Part A: Emotions drive markets................................... 17 1.3 Basic assumptions Part B: Natural forces drive emotions .......................... 19 Section II – Cycles within Cycles ..................................................................... 25 2. Decoding the Hidden Master Rhythm of the Universe............................... 27 2.1 Earth, Moon, and Sun alignment on 26 June 2010 – Observation date ...31 2.2 Earth, Moon, and Sun alignment – One tropical month before the observation date....................................................................................... 33 2.3 Earth, Moon, and Sun alignment – One synodic month before the observation date....................................................................................... 35 2.4 Earth, Moon, and Sun alignment – One lunar year before the observation date ......................................................................................................... 37 2.5 Earth, Moon, and Sun alignment – 19 years before the observation date . 39 2.6 The Master Rhythm – The Universal Harmonic Energy Lock ................. 43 3. Building the superposition wave that drives financial markets ................... 49 3.1 Market decomposition and cyclic market cloning .................................... 50 3.2 Example: How to build the superposition wave for the year 2008 ............ 55 3.3 Building the superposition wave for 2008 ................................................ 64 4. Decoding future market turns eight years ahead of time ............................ 69 4.1 Swing trading the superposition wave ...................................................... 71 5. Swing trading the Harmonic Energy Cycles – 1995 - 2010 ........................ 75 5.1 Automated trading system........................................................................ 86 5.2 Adding position sizing according to market risk ....................................... 87 5.3 Swing trading system with market risk-adjusted position size ................... 89 5.4 Hypothetical investment comparison ........................................... ............ 91
5.5 Robustness test ......................................................................................... 92 5.6 System analysis of the Harmonic Energy Cycles model – 1980 – 2010 / 30 years ........................................................................................................ 95 5.7 Performance Figures – Overall Summary Chart ..................................... 101 5.8 Summary ............................................ ................................................... 101 6. Cycles Model: “Out -of-Sample” Results and Special Findings .................. 103 6.1 Performance figures 2011-2014 ............................................................. 103 6.2 Deep Dive review and special findings for 2007 and 2012 ..................... 106 7. Function to compile a list with all entry/exit signals ................................. 113 8. Years with a similar energy alignment ....................................................... 114 Section III – Recurring Daily Sentiment Patterns........................................... 115 9. Dow Time Travel – “There is nothing new under the Sun” ...................... 117 9.1 Introduction and Technical Analysis Concept ........................................ 118 9.2 Trading Hypothesis of Recurring Sentiment Patterns ............................ 119 9.3 Technical Indicator and Trading System Construction .......................... 123 9.4 Mechanical Trading System Performance Review & Equity Curve ........ 128 9.5 Annual Metonic System Profit vs. Annual Dow Index Profit ................. 132 9.6 Statistical Test & System Validation .................................. .................... 133 9.7 Review: 2013 out-of-sample results ........................................................ 143 9.8 Summary and Conclusion...................................................................... 145 9.9 Electronic Supplement - Download Link ........................................... .... 147 9.10 Addendum............................................................................................. 148 10. EasyLanguage Code “Dow Time Travel”.................................................. 157 10.1 EasyLanguage Code for the Metonic Sentiment Index Indicator ............ 158 10.2 EasyLanguage Code for the Metonic Trading Strategy ........................... 160 10.3 EasyLanguage Code for the ZLEMA Function ...................................... 163 11. How-To Guide: Build a 8-year ahead looking signal list with Excel.......... 165
Section IV – The Beauty of Cyclic Time......................................................... 183 12. Non-Linear Predictive Indicators ............................................................. 185 12.1 Linear time vs. cyclical time ..................................... .............................. 186 12.2 Combination of linear and cyclic time to build predictive indicators ...... 188 12.3 Pseude code on how to transform indicators from linear to cyclic time .. 191 12.4 How to read predictive non-linear indicator forecast plots ..................... 191 12.5 Build trading systems with cyclic-time based indicators.......................... 194 12.6 Function to build non-linear indicator plots .......................................... 204 Summary and closing notes............................................................................ 205 Section V – Special: Geomagnetic disturbances and the Stock Market ........... 207 13. Decoding and Trading Geomagnetic Ap/Cp Index Data .......................... 209 Addendum ..................................................................................................... 211 14. Cycles Toolbox and Charting Platform .................................................... 212 15. Harmonic Energy Cycles - Detailed annual trade reviews 1995-2010 ...... 214 16. Manual calculation sheet for the superposition wave 2008....................... 231 17. Bibliography ............................................................................................ 235
