by Helmut Schmidhofer
SCHM stands for "spaced centered harmonic means", where:
"spaced" means that the plotted data is spaced above and below the true means;
"centered" means that the plots are centered on the period under consideration, not at the
end as is done with moving averages;
"harmonic" means that the average is not the arithmetic mean of the data but is the
reciprocal of the arithmetic mean of the data reciprocals.
The result is a smooth outer band that contains an inner band that contains the data,
where the data is the average of the week's open, high, low and close of the same data as in
the trend chart.
You will note two things - (i) when the data touches the inner band and the inner band
touches the outer band, a top or bottom is signalled; and (ii) to identify touching is a subjective
exercise.
Why subjective? Because the bands do not extend to the end of the data. That extension has
to be provided by you. Looking at the chart, do you think the inner band is approaching the bottom
or top of the of the outer?
If you can't answer that question, SCHM is not for you. If you can see that the inner is
approaching the bottom, then the question is, when will the data touch the bottom of the inner band
so I can go long?
I have superimposed three possible scenarios - (i) the current flat trend continues,
wait a week or more; (ii) the outer turns up, touching is happening right now (which actually
was the case); and (iii) the outer turns down, we may be witnessing a major top, be patient,
plenty of time to go short.
Now we have a tossup between greed and prudence - the latter would put a
trendline across the tops and wait until we have a breakout, losing some
slippage; the former would gamble on a potential bottom price and go long right now.
The point is - none of us would see a reason to go short, even though there are plenty of
shorting signals (for example as given by trendline analysis and also
by the moving averages discussed next).
In my opinion, SCHM is a system that encourages contrary thinking. If you get it right,
you have picked the top or bottom of the market. If you get it wrong, you haven't risked a lot.
SCHM is a relaxed trading method that takes very little of your time. Once a week, you
update your charts and decide how YOU think the next three to six weeks will go (real thinking, taking supporting and conflicting indicators into account,
not wishful thinking). You take your position acccordingly and place suitable stops, then don't look at it until next week.
I don't know of any publicly available charting services that offer SCHM bands. Therefore,
you have to do your own analysis. Actually, this is not a bad thing. I noticed that signals we
construct ourselves are much more relevant than signals that are served up by others.
If you have Windows and Excel, you can download schm.xls,
which produced the above graphic.
You can then load 52-week data of any stock, commodity or currency into the spread sheet
and examine its SCHM. You will need to adjust the spacing parameter according to the price level
you are examining. Because you have to bring your own judgement to the task, it is important to
"get your eye in", to get a feel for how the bands develop. Practice makes perfect.
The entry and exit points, holding period in weeks, and profit in pips are marked on the
chart. Because the trend channel is up, we do not trade against it, we
are simply out of the market.
Have a look at this chart of daily interbank rates for EUR/USD for the five years to
3 February 2007. The secular fundamentals in that period were
certainly against the USD and could persist for many more years (as at February 2007). The inner
band is 400 pips wide, the outer band 800 pips.
Note what happened EVERY time the daily data touched the inner band. And note how that
reaction is magnified when the inner band touches the outer band at the same time. Where
trendlines and moving averages perform best in
trending markets, SCHM bands perform well in both trending and drifting markets.
Curved trend channels used to be drawn by eye for minor, major and epochal trends.
The latter is still a very personal and subjective affair that takes into account the fundamentals.
You can see that the EUR/USD was in a strong uptrend for nearly three years and is presently drifting.
Drifts like trends don't last forever. What will the next epochal trend for EUR/USD be? Whatever it shall
be, we shall make use of SCHM bands to pick the top and bottom of the price action.
Back to trendline analysis Proceed to moving averages
|
