Tuesday, April 9, 2013

Hurst's Cyclic Theory

Cycles Combining

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).

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