Trading with Hurst Enveloppes

Hi William

I just posted these messages for information about the history of the use of “Envelopes”, Channels, bands etc in the Technical Analysis.

The constant-width technique was used because at the time it was easier to add a “constant” - a fixed number - than to compute a percentage or a standard deviation and add it to the moving average or the “centerline” to build an enveloppe.

It was less time-consuming

DJIA Today in 1 mn : Envelopes parameters : 62.5, 31.25, 15.625,
DAX Today in 1 mn : Envelopes parameters : 31.25, 15.625, 7.8125

To make a long story short : DAX is near 10.000 and DJIA near 20.000 :smile:

The 3 Enveloppes are offsetted 16 units backwards

AUSTRALIA 200 Today in 1 mn : Envelopes parameters : 15.625, 7.8125, 3,90625
SPX Today in 1 mn : Envelopes parameters : 7.8125, 3,90625, 1,953125

To make a long story short : AUSTRALIA 200 is near 5.000 and SPX near 2500 :smile:

The 3 Enveloppes are offsetted 16 units backwards

Donchian Channels

In the 1960s Richard Donchian took the simple,but elegant, approach of letting the market set its own trading envelopes via his four-week rule.

The concept was simplicity itself. One bought when the four-week high was exceeded and sold when the fourweek low was broken. In a subsequent test of computerized trading systems,this rule was selected to be the best of many tested by Dunn & Hargitt,a well-respected commodity trading and analytics firm of the time.

The four-week rule was soon turned into envelopes by drawing lines equal to the highest high of the past four weeks and the lowest low of the past four weeks. This concept of setting the upper limit at the n-period high and the lower limit at the n-period low is often referred to today as a Donchian Channel
(Figure 6.4).

This concept is rumored to be at the heart of one of the more successful trading approaches in wide use today,that employed by the Turtles.

DAX Today in 1 mn : Envelopes parameters : 62.5, 31.25, 15.625,

The 3 Enveloppes are offsetted 16 units backwards

Valuation Envelopes

In 1966, Investment Quality Trends (IQT),an investment newsletter edited by Geraldine Weiss,introduced a new type of envelope,the valuation envelope (Figure 6.5).

Using an historical perspective, IQT presented monthly charts that included overvaluation and undervaluation lines based on dividend yield.

As we understand it, IQT uses the high and low yields achieved during a strategic base period as benchmarks to project future overvaluation and undervaluation levels based on then-current dividends. For a stock with growing dividends this envelope

resembles a rising megaphone—a cone that widens as time passes.

This was an early form of Rational Analysis,a concept we have defined as ‘‘the juncture of the sets of technical analysis and fundamental analysis.’’

Indeed,Ms. Weiss was a pioneer. At the time,few newsletters took a rigorous quantitative approach. It
must have been a lot of work in the days before computer power was widely available.

Thank you Alain for the informative presentation. There was a lot there and I need to go back listen to the webinar again. I agree with your comments that simpler is better and if it continues to work for you don’t mess with it.

I have run across two variations of price bands that might be worth sharing. The first is volatility-based envelopes developed by Mohamed El Saiid. Like Hurst envelopes, these bands use a displaced moving average as the middle band but volatility-based standard deviation bands (like Bollinger) above and below the middle band. It gets really fancy when polynomial regressions are used to project the bands into the future. The issues are: 1) the bands are not constant width (if that matters to anyone) 2) the projections repaint in real-time, sometimes dramatically, so they are difficult to use for trading 3) The band parameter inputs do not allow longer time frames because of #2 above. They are available on several trading platforms. I have not used them.

A method I developed by necessity uses a Hull EMA combined with traditional percent-based moving average envelopes. The Hull EMA acts as a price filter that minimizes lag (only about one day over my trading time frame) and the percent based envelopes produce a constant width. Like your approach, the band parameters can be adjusted based on the recent price action. In my view, this was a nice balance between lag and having reasonably accurate constant-width, real-time bands. Below is a picture of one set of bands (20 day Hull EMA with 1.5% bands). I am still working out the parameters of using multiple bands together.

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Thank you Curt !

I am open by curiosity to all kind of experimentations. But the basis of the system is :slight_smile:

a) the efficiency of the “vibration” calculation meaning practically : is there really a “link” between the Octave / vibration parameter and its subdivisions and the price fluctuations of the financial instrument within the corresponding Price Range

b) the efficiency of the Triad ( to talk as David or Tony Plummer) of Enveloppes - let’s say Long Term, Mid-Term and Short-Term to give you enough informations for Analysis and Trading.

c) then the system allows everybody in a very simple and quick manner to solve this scaling problem and to determine the adequate vibration of any financial instrument whatever the Price Range and the Time Frame

IMHO the use of only one Envelope is a good start but not enough.

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By the way constant-width parameter was used by Hurst because at the time (1970) all work by his readers was made by hand.

First they had to calculate by hand (if they wanted) the Centered Moving Average. Note that Hurst very often talked about drawing per hand what he calls a “Centerline” in the middle of the graph - an approximated Moving Average.

Then it was easier to add or substract to the centered moving average results a fixed number of X points than to calculate a specific result in % for each point.

And how to deal at that time with “standard deviation”.

DAX Today in 1 mn : Envelopes parameters : 62.5, 31.25, 15.625,

The 3 Envelopes are offsetted 16 units backwards

PERNOD RICARD - Beverages - Long Term Parabolic Moves

Octave / Vibration = 125 / = 15,625

LAGARDERE - Medias - Long Term Parabolic Moves

Octave / Vibration = 125 / = 15,625

COPPER on a 1 Month basis (30 days)

Envelopes parameters : 0.078125, 0.0390625, 0.01953125

COPPER on a 1 Day / 1 Minute basis

Envelopes parameters : 0.0125, 0.00625, 0.003125

Bollinger on Hurst’s Envelopes

The next major development came in 1970 when J. M. Hurst published The Profit Magic of Stock Transaction Timing.

Hurst’s interest was in cycles,and he used ‘‘constant width curvilinear channels’’ to clarify the cyclic patterns in stocks. His approach was to use multiple hand-drawn envelopes (see Figure 6.6) that related
to the various cyclic components of price action.

The envelopes nested inside one another,often becoming congruent at major turning points. In the back of his book,he gave some broad hints at how this process might be mechanized (see Figure 6.7) but the examples presented in the text appear to be hand-drawn.

We suspect that the concepts were beyond the technology then commonly available. In the years since,numerous attempts have been made to systematize Hurst’s work,but we are not aware of
any successful results.

The development path of trading bands gets a bit murky here, and credit is hard to assign. In the next phase,inter est seems to have broadened,and several analysts appear to have been working on similar ideas at the same time. The main technique employed in this phase was to shift a moving average in a parallel manner up and down to form bands around price (Figure 6.8).

The offset was typically a number of points or a percentage of the average.

See,for example,Table 6.2. Hurst had clearly favored the use of moving averages in his book,but we think the idea of shifting the averages by some mechanical means came later, perhaps in the early 1970s. The problems of this approach became apparent immediately.

First,the width had to be determined empirically on an issue-by-issue basis.
Second,even having done that, the widths needed adjustment over time. Thus, while percentage or point bands did provide useful definitions of high and low for traders, they were hard to use and involved considerable guesswork on the part of the user.

8 x 6 years

Envelopes parameters : 12.5, 6.25, 3.125

DAX Today in 1 mn : Envelopes parameters : 31.25, 15.625, 7.8125

The 3 Envelopes are offsetted 16 units backwards

DAX Today in 1 mn : Envelopes parameters : 31.25, 15.625, 7.8125

The 3 Envelopes are offsetted 16 units backwards

UNITED TECHNOLOGIES Parabolic Moves

Timeframe 48 Years = 8 x 6 Years

Octave / Vibration = 125 / 8 = 15.625

DUPONT DE NEMOURS Parabolic Moves

Timeframe 64 Years = 8 x 8 Years

Octave / Vibration = 100 / 8 = 12.5