[blackcat] L2 Ehlers Market Mode Identifier

Level: 2

Background

John F. Ehlers introuced Market Mode Identifier in his "Rocket Science for Traders" chapter 11. The simplified model of the market, derived from the Drunkard's Walk problem, has only two modes-the Cycle Mode and the Trend Mode. Through the derivation of the Sinewave Indicator and the Instantaneous Trendline, Ehlers had shown several ways to estimate which mode the market may have for a given moment. As with most technical indicators, the decision point between modes is not clear-cut. In fact, trying to automate the decision often leads to a great deal of chatter and rapid back and
forth switching of decisions.

Function
blackcat L2 Ehlers Market Mode Identifier is used to identify market status is in Trend Mode or Cycle Mode.Since the Cycle Mode exists for the smallest fraction of time and since most traders make the most money following a trend rather than a cycle, it is best to assume that the market is in a Trend Mode unless some very specific criteria are met. There are only two criteria to establish a Cycle Mode. First, a Cycle Mode exists for the period of a half-dominant cycle after the crossing of the two Sinewave Indicator lines. Second, a Cycle Mode exists if the measured phase rate of change is more than two-thirds the phase rate of change of the dominant cycle (2*pi /Period) and is less
than 1.5 times the phase rate of change of the dominant cycle. There is another condition that defines a Trend Mode. This condition is derived from pragmatic observation, not theoretical considerations. When the market makes a major reversal, it often does this with great vigor. When this occurs, the prices have a wide separation from the Instantaneous Trendline. When the prices are widely separated from the Instantaneous Trendline, it is possible for the Cycle Mode conditions to be met-but the Cycle Mode identification is clearly incorrect. Dr. Ehlers have therefore inserted another overriding rule for these cases. That rule is that if the SmoothPrice (the 4-bar WMA of the Price) is separated by more than 1.5 percent from the Instantaneous Trendline, then the correct market mode is the Trend Mode.


Key Signal

Smooth --> 4 bar WMA w/ 1 bar lag
Detrender --> The amplitude response of a minimum-length HT can be improved by adjusting the filter coefficients by
trial and error. HT does not allow DC component at zero frequency for transformation. So, Detrender is used to remove DC component/ trend component.
Q1 --> Quadrature phase signal
I1 --> In-phase signal
Period --> Dominant Cycle in bars
SmoothPeriod --> Period with complex averaging
DCPeriod ---> Dominant Cycle Period
Trendline ---> IT fast line
SmoothPrice ---> IT slow line
Trend ---> Trend identifier: 1 for trend; 0 for cycle.



Pros and Cons

100% John F. Ehlers definition translation of original work, even variable names are the same. This help readers who would like to use pine to read his book. If you had read his works, then you will be quite familiar with my code style.

NOTE: I had tried several time frames, and found it did not work well for time frame < 1W.

Remarks

The 10th script for Blackcat1402 John F. Ehlers Week publication.

Readme

In real life, I am a prolific inventor. I have successfully applied for more than 60 international and regional patents in the past 12 years. But in the past two years or so, I have tried to transfer my creativity to the development of trading strategies. Tradingview is the ideal platform for me. I am selecting and contributing some of the hundreds of scripts to publish in Tradingview community. Welcome everyone to interact with me to discuss these interesting pine scripts.

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Level 5 : indicator/strategy that do not disclose source code. private version of Level 3 script with my accumulated script processing skills or a large number of custom functions. I had a private function library built in past two years. Level 5 scripts use many of them to achieve private trading strategy.