White Paper 3: Trading with JM Hurst

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 and a few years later a workshop-style course which was called the Cyclitec Cycles Course (now available as “JM Hurst’s Cycles Course”). It is in the Cycles Course that the full theory is explained in great detail.

An in-depth explanation of JM Hurst’s Market Cycles Principles and Cyclic Analysis can be found at:

This White Paper is primarily about trading JM Hurst’s Market Cycles, but to begin, let’s look at Cyclic Analysis again.

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).

Cyclic Analysis Notation

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.

Detailed Analysis

EURUSD trade

Beyond Hurst (Intraday Trading)

Hurst published his theory almost 40 years ago, and it is a testament to the validity of the theory that it can be applied effectively to the markets today. Of course now we have the extra benefit of being able to work with the power of modern computers. It has been an exciting and rewarding experience to extend Hurst’s theory into the realm of intraday analysis, a journey which has presented many challenges. For instance, it is a feature of Hurst’s cyclic theory that cycles move through time, regardless of whether we are trading financial markets or not. A cycle keeps moving through the weekend, but we have no evidence of it because we aren’t trading. When analysing daily data this is not much of a problem, but when analysing intraday data it becomes a fairly big problem. On a Monday morning one is faced with a gap of over 60 hours in most markets, during which time there would have been a good deal of cyclic activity. There would have been 7 or 8 full waves of the 8 hour cycle, and if that cycle is your chosen trading cycle, Mondays present an interesting challenge: it will usually take several hours to identify the current phasing of the 8 hour cycle.

Introducing Sentient Trader

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. I found the process so time consuming that it was completely impractical for me (as a private trader) to trade cycles shorter than several months in length.

And so I started to develop a software programme that would do all the time consuming work on my behalf. That was six years ago in 2005… and now the software, called Sentient Trader, does indeed do all the time consuming work, and a good deal more. It performs an impressive phasing analysis which is based on the pattern recognition process that Hurst advocated, and it also allows one to exert one’s own knowledge and experience onto the analysis. It will do this all the way down to cycles of only a few minutes in length. It will then also make trading decisions on the basis of that analysis, and use an extended theory of filtering trades according to the character of the market.

What Next?

Through reading this series of White Papers that:

  1. Introduce JM Hurst’s Market Cycles Principles,
  2. Describe the importance of Cyclic Analysis and
  3. Outline the power of trading JM Hurst’s Cycles,

you will have begun to understand how you too can profit from Hurst’s Cycles.

Alternatively…

Learn About "Hurst Signals" & FLD Trading Strategy