Trading And Engineering In Action
John F. Ehlers Of Mesa
by Jayanthi Gopalakrishnan
John Ehlers pioneered the use of the Mesa (maximum entropy spectral analysis) algorithm for measuring market cycles in the early 1980s. The Mesa technique is now acknowledged by leading technical analysts to be an accurate and effective way of measuring market cycles. More recently, Ehlers has written about applying advanced digital signal processing techniques, including Fisher transforms, Hilbert transforms, and nonlinear filters to technical analysis.
Ehlers, president of Mesa Software and a registered CTA, has seen his software receive 25 Readers' Choice Awards from STOCKS & COMMODITIES magazine over the years. Currently, Mesa Software develops automatic trading systems that adapt to market conditions.
A Contributing Editor for STOCKS & COMMODITIES , Ehlers has written several books, including Mesa And Trading Market Cycles, Rocket Science For Traders, and Cybernetic Analysis For Stocks And Commodities. He is a frequent speaker at conferences and seminars on the subject of cycles in the markets.
STOCKS & COMMODITIES Editor Jayanthi Gopalakrishnan spoke with John Ehlers via telephone on October 29, 2003.
The market is not emotional, and it has no favorites. It serves no purpose to get emotionally involved in trading.
How did you get interested in the financial markets?
In the 1970s, I got a bonus. I decided to either invest it in real estate or in commodities. And not wanting to be a landlord and fix toilets in the middle of the night and so forth, I chose commodities as the better alternative and started to trade. I've pretty much been at it ever since. After using broker advice for several years, I started using my engineering skills by applying them to trading.
For our audience, what is Mesa? Do you design software?
Yes, I do. Mesa is an acronym for maximum entropy spectral analysis. I ran across Mesa in the course of my engineering work and immediately recognized its benefit to my trading. I applied Mesa to indicators for my own trading and wrote a few articles about it. Several traders wanted to use the Mesa approach also, and so I became a vendor by default.
How did you end up doing that?
J. Welles Wilder had written his book where he introduced the relative strength index (RSI). He selected 14 days as the length to use for the calculation. I couldn't figure out why he chose 14 and neither could anybody else I spoke to, so I concluded the indicator could be made a lot more powerful if it were adaptive to something that was going on in the market -- volatility or something. But it was a time-based thing, and I knew the best way to get a time-based estimate would be to measure the cycle.
...Continued in the January 2004 issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the January 2004 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2003, Technical Analysis, Inc.
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