In the 1970’s an American engineer called JM Hurst published a theory about why financial markets move in the way they do. The theory was the result of many years of research on powerful mainframe computers, and it became known as Hurst’s Cyclic Theory.
Hurst published two seminal works: a book called The Profit Magic of Stock Transaction Timing, followed a few years later by a workshop-style course which was called the Cyclitec Cycles Course (later published as JM Hurst’s Cycles Course – currently not in print).
There are a number of very enthusiastic advocates, prominent traders and writers who proclaim Hurst as the “father of cyclic analysis” and confirm the efficacy of the theory (including the late Brian Millard who wrote several books about Hurst’s theory), but why is it that the theory isn’t better known and more widely used by technical analysts? There are, in my opinion, two reasons:
Firstly, Hurst’s Cyclic Theory is not “easy”. While it is simple and elegant in its essence, it is not a simple theory to understand or to apply. The Cycles Course is over 1,500 pages long, and most people take several months to work through it.
Secondly, although the theory presented in both the Profit Magic book and the Cycles Course is the same, there is a vitally important distinction between the analysis processes presented in the two. Hurst claimed his success on the basis of the process presented in the Cycles Course, whereas many people read the Profit Magic book and go no further, with the consequence that they never discover the more effective process presented in the Cycles Course.
Hurst’s Cyclic Theory in a Nutshell
Hurst defined eight principles which like the axioms of a mathematical theory provide the definition of his cyclic theory. The eight Principles of Hurst’s Cyclic Theory are:
The Principle of Commonality
All equity (or forex or commodity) price movements have many elements in common (in other words similar classes of tradable instruments have price movements with much in common)
The Principle of Cyclicality
Price movements consist of a combination of specific waves and therefore exhibit cyclic characteristics.
The Principle of Summation
Price waves which combine to produce the price movement do so by a process of simple addition.
The Principle of Harmonicity
The wavelengths of neighbouring waves in the collection of cycles contributing to price movement are related by a small integer value.
The Principle of Synchronicity
Waves in price movement are phased so as to cause simultaneous troughs wherever possible.
The Principle of Proportionality
Waves in price movement have an amplitude that is proportional to their wavelength.
The Principle of Nominality
A specific, nominal collection of harmonically related waves is common to all price movements.
The Principle of Variation
The previous four principles represent strong tendencies, from which variation is to be expected.
In essence these principles define a theory which describes the movement of a financial market as the combination of an infinite number of “cycles”. These cycles are all harmonically related to one another (their wavelengths are related by small integer values) and their troughs are synchronised where possible, as opposed to their peaks. The principles define exactly how cycles combine to produce a resultant price movement (with an allowance for some randomness and fundamental interaction).
These eight simple rules distinguish Hurst’s theory from any other cyclic theory. For instance most cyclic theories consider cycles in isolation from each other, and cycles are often seem to “disappear”. By contrast cycles never disappear according to Hurst’s theory, but they may be less apparent because of the way in which cycles combine. It is the fact that Hurst’s theory stipulates that there are an infinite number of cycles that makes it particularly different, and also begins to explain why it is impossible to forecast price movement with 100% accuracy. Just as it is impossible to conceive of the sum of two infinite numbers, it is impossible to define the result of combining an infinite number of cycles.
We use a software application (Sentient Trader) developed over many years now by David Hickson. David is probably the leading “Hurstonian” out there and has done a great deal of work to encourage the understanding and use of Hurst's work. Sentient Trader and its algorithms utilise the methods taught by Hurst in his Cycles Course hence our adoption of this method of Cycles analysis here.
Phasing Analysis in the Cycles Course
In the Cycles Course Hurst advocated a different analytical approach, a process which is simple in essence, and is based upon a form of pattern recognition and the application of an advanced (hopefully) human brain to the resolution of complex dilemmas.
The pattern recognition approach involves three stages:
Entry Stage: First of all the analyst identifies major troughs (“visually evident” troughs because they can be seen clearly) of the longest cycle that appears to be present in the data (Hurst called this the dominant cycle). If a particular expected trough is not apparent, or there is ambiguity in the positioning of the trough the positioning of this trough is postponed until the analyst has more detailed information.
Extension Stage: The analyst then considers the next shorter cycle in the cyclic model, and identifies the troughs of that cycle using the previously positioned troughs of the longer cycle as anchoring points. The positioning of shorter cycle troughs often resolves the positioning of the longer cycle troughs, and so the analyst is constantly moving between the cycles, but generally moving from the longest (dominant) cycle down to the shortest cycle.
Completion Stage: Having resolved the shortest cycle visible in the data (the 5-day cycle if one is working with daily data), the analyst reverses the direction of the process, and resolves the position of all the longer cycles.
It is this different approach that provides the true key to Hurst’s cyclic theory because it presents a complete “cyclic model”: it informs the analyst of the phasing of all known cycles, not merely the phasing of one or two cycles. By understanding the complete picture (as complete as is possible, given limitations on available data) the analyst can trade according to how the cycles COMBINE to influence price.
Having performed a phasing analysis, the results are plotted on a chart using a notation system proposed by Hurst, involving the placing of diamonds beneath the price to represent the troughs of the various cycles. The higher the pile of diamonds, the longer the cycle which is forming a trough at that point.
Overview of Phasing Analysis
The true genius of Hurst’s theory as presented in the Cycles Course was in the way that he proposed an analysis should be conducted. The analysis is called a “Phasing Analysis” because it is a matter of determining the current phase of as many cycles as possible. Hurst advocated a process which is simple in essence, and is based on a form of pattern recognition and the application of an advanced (hopefully) human brain to the resolution of complex dilemmas. This method differs from the approach he presented in the Profit Magic book which was purely “mathematical” in that it required the plotting of a displaced moving average (inflated to create channels around price – the well known Hurst envelopes).
The pattern recognition approach involves identifying major troughs (“visually evident” troughs because they can be seen clearly) of the longest cycle that appears to be present in the data (Hurst called this the dominant cycle). If a particular expected trough is not apparent, or there is ambiguity in the positioning of the trough the resolution of this trough is postponed until the analyst has more detailed information. One then considers the next shorter cycle in the cyclic model, and identifies the troughs of that cycle using the previously positioned troughs of the longer cycle as anchoring points. The positioning of shorter cycle troughs often resolves the positioning of the longer cycle troughs, and so the analyst is constantly moving between the cycles, but generally moving from the longest (dominant) cycle down to the shortest cycle. It is this different approach that provides the true key to Hurst’s cyclic theory. This approach elevates analysis from a mathematical process to a skill (perhaps even an art) which the analyst strives to refine and perfect.
Having performed a phasing analysis, the results are plotted on a chart using a notation system proposed by Hurst, involving the placing of diamonds beneath the price to represent the troughs of the various cycles. And then one moves on to the second aspect of Hurst’s theory: making trading decisions on the basis of the cyclic analysis.
This aspect of Hurst’s theory is once again distinguished from other cyclic theories. Most cyclic theories advocate buying a market when the cycle is rising, and selling when the cycle is falling. Hurst’s trading methodology on the other hand takes into account the fact that price is the result of a composite of many cycles, and only advocates buying when a cycle is rising, and the two cycles longer than the trading cycle (in the harmonic collection of cycles) are also rising. Similarly one should only sell (go short the market – exits are a different matter) when the two cycles longer than the trading cycle are also falling. There are further guidelines to be observed before selling short, because of the principle of synchronicity which tells us that troughs are synchronised – and therefore much easier to trade, whereas peaks are not synchronised and are therefore more complicated to identify, and much more difficult to trade.
Timing Trade Entries and Exits
Beyond the above overall guideline as to when one should enter the market, trading according to Hurst’s cyclic theory requires that one times one’s trading actions by means of using two cyclic tools: the FLD (Future Lines of Demarcation) and the VTL (Valid Trend Line).
The FLD (Future Line of Demarcation) of a particular cycle is calculated by transposing the median price by roughly half the wavelength of the cycle in question into the future.
The VTL (Valid Trend Line) of a particular cycle is a trend line which joins two consecutive troughs or peaks of that cycle (as seen in the price movement), and then further validated by obeying a few simple rules defined by Hurst.
These tools provide evidence of a cyclic nature that a trough or peak of a particular cycle has occurred, and so they are used to create what Hurst called “action signals” – when price crosses an FLD or VTL a signal is generated, whereupon one should take an action (such as buying or selling).
This is all very well, but if one were to wait for evidence that one’s trading cycle had experienced a trough (by waiting for price to cross the FLD or VTL applicable to that cycle) then one would have missed a good deal of the price move. This is where the true beauty of Hurst’s principles emerges. Because of the principle of synchronicity (which states that troughs are synchronised) one knows that the trough of the trading cycle will be synchronised with the troughs of several shorter cycles. Therefore when evidence is received that a trough of a much shorter cycle has occurred (by price crossing the FLD or VTL applicable to that shorter cycle) then one can take action. Because of the shorter wavelength of this synchronous trough one catches much more of the price move.
Sentient Trader & Other Software
Performing a good phasing analysis can take some time. And then making the trading decisions based upon that phasing analysis can take even more time, so that trading on the basis of Hurst’s cyclic theory has always been a time consuming process and it is therefore not practical without the benefit of modern computer processing power and appropriate software. Primarily we have used a software application developed by David Hickson: “Sentient Trader” to perform the full Hurst Cycles Analysis that is part of our overall analysis here at TPA. More recently we have been able to add a Hurst Cycles Indicator and charts using these are updated Daily on our site for many instruments on multiple time frames.
We have also been working with a major software vendor to assist them in adding the Hurst Cycles Analysis tool set to their existing application. Once released this will facilitate the addition of the Hurst Cycles directly on the same charts as our other techniques.
We encourage members to also watch the series of video tutorials in this section which have been provided by David Hickson of Sentient Trader ( www.sentienttrader.com ) to further enhance your understanding. For those wanting to study Hurst's Cycles Theory in greater depth we recommend the following reading:
|The Profit Magic of Stock Transaction Timing||J.M. Hurst|
|Mastering Hurst Cycle Analysis||Christopher Grafton|
|Channels & Cycles: A tribute to J.M Hurst||Brian J. Millard|
|Future Trends From Past Cycles||Brian J. Millard|
We would also highly recommend purchasing and completing David Hickson’s FLD Trading Strategy Course which is available to our members.