The basic idea behind a MetaStock binary wave is to use "if" statements
on several MetaStock indicators and have them return plus one for a bullish indication,
minus one for a bearish indication, and zero for a neutral condition. Then you add them
all up for your binary wave indicator. I decided to format all my indicators so they could be plotted
as a histogram. For these indicators plotting as histograms, positive is bullish and negative
is bearish. To cut down on whipsaws, I decided that over +5 would be bullish, under -13 would be
bearish and anything in between would be neutral. Therefore my binary wave formulas are:
BW2 Demand Index
If(Tema(DI(),21) > 5,+1,If(Tema(DI(),21) < -13,-1,0))
BW3 Linear Regression Slope
If(Tema(10000*LinRegSlope(C,34)/C,34) > 5,+1, If(Tema(10000*LinRegSlope(C,34)/C,34) < -13,-1,0))
If(Tema(CCI(21),21) > 5,+1, If(Tema(CCI(21),21) < -13,-1,0))
If(Tema(ROC(C,21,%),21) > 2,+1,If(Tema(ROC(C,21,%),21) < -2,-1,0))
BW6 Money Flow
If(Tema(MFI(21),21)-50 > 5,+1,If(Tema(MFI(21),21)-50 < -5,-1,0))
If(Tema(CMO(C,21),21) > 5,+1,If(Tema(CMO(C,21),21) < -5,-1,0))
BW8 VAR ma
If(Mov(C,21,VAR) > Mov(C,55,VAR) AND HHV(Mov(C,233,VAR),5) =
HHV(Mov(C,233,VAR),13),+1,If(Mov(C,21,VAR) < Mov(C,55,VAR) AND
LLV(Mov(C,233,VAR),5) = LLV(Mov(C,233,VAR),13),-1,0))
The next formula just adds up the binary wave.
Fml("BW2") + Fml("BW3") + Fml("BW4") + Fml("BW5") + Fml("BW6") + Fml("BW7") + Fml("BW8")
Next, I decided to do something a little different. Since the whole purpose of this test is to catch a trending stock, I decided to add an amplifier that would get larger as the trend got stronger. Since I like Fibonacci numbers, I decided to use Rsquared as a measure of trend strength and base my amplifier on Fibonacci numbers. The formula I finally came up with after a lot of tinkering follows.
If(RSquared(C,21) > 0.8,5,If(RSquared(C,21) > 0.6,3,If(RSquared(C,21) > 0.4,2,
The last step in constructing the binary wave was to decide on the smoothing and put it all together. Of course, I used tema smoothing.
Tema Binary Wave Composite
Periods := Input("Enter Tema Smoothing Periods",8,233,21);
Tema(Fml("BW Add")*Fml("BW Amplifier"),Periods)
The final step is to come up with a system test for the Tema Binary Wave Composite. Remember, the binary wave is just made up of a bunch of technical indicators that I give a +1 value when bullish, 0 when neutral, and -1 when bearish. Then they are summed and smoothed. So in general a positive value is bullish and a negative value is bearish. Also a rising number is bullish and a falling number is bearish. Therefore you could use a zero crossover to the upside as a buy signal and a crossover to the downside as a sell signal. If you had a good algorithm, you could also use a rise from a negative peak (or trough) as a buy signal and a fall from a positive peak as a sell signal. I decided to use a 8 day moving average of the BW with a crossover of the BW for my algorithm in an attempt to get an early signal on a rise from a negative peak. It does have the disadvantage of finding way too many peaks so I only use it as an Alert. For confirmation I use the QStick function and a variable moving average function.
QStick was developed by Chande as a way to quantify candlesticks. Since the difference between the open and close prices lies at the heart of candlestick charting, QStick is simply a moving average of that difference. Negative values of QStick correlate to black candlesticks, positive values to white candlesticks. Since in general black candles are bearish and white candles are bullish, this indicator can also be plotted as a histogram and interpreted the same was as the Binary Wave. The formula is:
Binary Wave Histogram
Periods := Input("Enter Periods",1,233,34);
Now to get my open long signal I use the ALERT signal with an 8 day vma BW crossover of the BW. Then to actually get the signal, I have to have both the QStick rising and the 21 day vma greater then the 55 day vma.
Therefore my buy signal became: