EdgeWare FastGraph Version 3 - Manual (Page 39)

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9.0 MEM for Cycle Analysis
A larger number of market technicians use cycle analysis in their trading. Proponents of
cycle analysis will claim that the market moves in somewhat repeatable cycles and if the
period(s) of these cycles can be determined then it may be possible to make predictions
of short term price movements. Just knowing if the market is in a cycle mode or trending
mode can be very important to an investor. If the market is in a trending mode then the
investor should use trend following methods such as moving averages, and if the market
is in a cyclic mode then trading methods such as stochastic are better tools to use.
The method FastGraph uses to determine cycle information is called the Maximum En-
tropy Method (MEM) that has been popularized by John F. Ehlers. For an excellent book
on the subject see Mr. Ehlers’s MESA and Trading Market Cycles. The mathematics of
the MEM are quite involved and beyond the scope of this manual. We will concentrate
on how to interpret the charts in FastGraph.
Note: The color charts do not reproduce well in black & white. It may be a good idea
to bring the following examples up on your color monitor as you walk through this sec-
tion.
To activate the MEM control options you must have selected and loaded the FastTrack
families or funds. Once this is done the following options can be found on the main Fast-
Graph screen:
The two MEM control parameters will be explained later in the chapter. For now, load
the FastTrack funds, find and load the NASDAQ composite index (OTC-C), select the
Show MEM option, go to the FastGraph Data screen and select this column of data that
has been loaded., and click on the graph icon. You will see a chart similar to the follow-
ing which was made for a period of six months with an ending date of October 1996: