Underlying Trend: Sigma-L
In this article we look at how to account for the ever present underlying trend in the context of the advanced fld trading strategy explored previously.
Markets Are Never Flat
A simple concept, but one which must be considered for our purposes as Hurstonians, is underlying trend. Named by Hurst as ‘sigma-l’ to simply mean ‘the sum of all cycles’, it is inherent in a system which assumes cycles form an infinite series of increasing period. This underlying trend (which can be thought of as a sum of sinusoidal functions) is never static. It may appear to be flat when shorter cycles form sideways consolidations but this is just a result of a much larger period cycle, relative to the cycle in focus, turning up or down.
Traditional technical analysis has come to love the simple moving average as an indicator of trend, usually set at a arbitrary period of 50, 100 or 200 to smooth higher frequencies. This is a blunt tool and flawed. Firstly by the fact moving averages must be time shifted by the (period/2) to account for the digital filter lag and, secondly, the moving average makes no attempt to decompose the signal, save for it’s low pass cha…