I came across this method of technical analysis via the work of J.M. Hurst, an engineer who found an interest in the analysis of stocks in the mid 20th century.
Effectively, the process is centered around uncovering patterns, in the form of “cycles”, based on the presumption that repeatable cycles often occur and, current price action can be extrapolated to accurately predict future price. Furthermore, it is claimed this inherent cyclicality accounts for a significant portion of general market movement.
As for what drives these cycles, Hurst doesn’t specifically say (in his work I’ve read so far). He only makes the assurance cycles exist, and can be used to make money. He says when properly applied, the rate of success is around 90%.
A possible catch? He said this in 1970. Are the markets different enough to have altered this? Maybe so. I personally have not tested his framework enough to attest to the current effectiveness. That said, the skill, temperament, and experience of the person committing trades is just as important.
Importantly, complementary and novel analytical tools can, and probably should be used in tandem with the central model of his cyclical analysis technique to reduce risk and maximize returns. That is, as long as it does not defy any crucial “rules”, for lack of a better term, of Hurst’s framework.
Key talking points of his work include “timing the market” and compounding several small trades, contrary to the long held belief or interpretation of “time in the market vs timing the market”, and the near impossibility of beating the market long term by day-trading. Based on this, many may question the legitimacy of the claims.
I certainly believe the cyclical price analysis proposed by Hurst has a place, and can be done effectively, even in todays markets.
