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Maximum Entropy

DLL's for

Maximum Entropy Method (MEM) DLL ( Cycle analysis)


The MEM code can be used to input the main period into an oscillator (as the look back period), to calculate the phase of the price data series, as a look back period for a channel breakout system...

The MEM prediction by itself can be astonishing as well as very deceptive, according the the spectrum stability over time.

Usually, you will need the main period and eventually the Power value to use this code into a trading system.

As for all of our DLL's accepting data series as inputs to the code, you can load anything you want into the input array( raw prices, or indicators). These values can even be changed during time, as the analysis is performed again on the data series loaded into the input  array. This gives more flexibility (as you can change the data series by a single line of Easy Language), and the price to pay is some lack of speed.


mem1.gif (67153 bytes)
Printed using TradeStation™ 4 by TradeStation Technologies
Click on the above thumbnail image to get the full size picture.

MEM DLL applied   to the raw close.

The very bottom chart represents the Power spectrum for the first and 2nd frequencies
The upper part shows the values of the period of these frequencies.
one may remark that when the power spectrum shows high reading,
cycles may exist in the original data serie (white rectangles).
A linear trend usually show high values of the period and a low reading
of the Power spectrum (between the white  windows to the left).
A trend with a cyclical component shows high period readings,
but also a power spectrum of some importance (rightmost white window).
Of course, these descriptions are somewhat arbitrary,
and they are there to explain the concept.
The main period graph (blue line) is somewhat jerky,
and you will certainly need to smooth it by using a short term moving average.


mem2.gif (65615 bytes)
rinted using TradeStation™ 4 by TradeStation Technologies
Click on the above thumbnail image to get the full size picture.

MEM DLL applied here to the RSI oscillator.
The RSI is displayed in subgraph2.
The bottom subgraph displays the Power Spectrum (4 main frequencies) as colored histograms
and the related  4 periods of importance  color matching (lines on the top of the subgraph3).
Even with this one, the cyclical behaviour appears on the same areas of the original bar chart.
The main period (blue line) has been smoothed with a 3 bars moving average.
Both graphs use the same 10 min SP500  future data.

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PRICE  is 240


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TradeStation Code 1996-1998 Philippe Lembo- HLG Gestion & Pierre Orphelin-Sirtrade International .
Sirtrade International 110, avenue du President Wilson -F93100 Montreuil. FRANCE.

See also...

Maximum Entropy
Lomb Periodogram
FFT filtering
Market Profile
Tomorrow DLL
Compression Bars
Pt & Figures DLL
Equity Curve

MEM analysis 

MEM is a short name for Maximum Entropy Method, based on the JP Burg algorithm.

Also know as MESA (commercial name of the adaptation made and sold by John Ehlers)

It's use in technical analysis has been popularized by Anthony Warren and John Ehlers, contributors to Technical Analysis of Stocks and Commodities Magazine.

A lot have been said about this code and its ability to extract cyclical components from a price data serie, and the weakness of the FFT vs MEM code has been widely spread by these authors.
Nevertheless, extracting tradable cycle information from price data is not an easy piece of cake, as cycles vanishes very quickly, change and are often combined into complex wave shapes.

This MEM algorithm extracts the five main cycle components, the Power spectrum of each five fundamental frequency (sorted by magnitude), and has the ability to be used as a predictive tool by projecting in the future using the current MEM coefficients.



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Maximum Entropy