[blackcat] L2 Ehlers Synthetic Prices Candles

Level: 2


John F. Ehlers create Synthetic Prices Using Random Numbers with Memory in his "Cycle Analytics for Traders" chapter 8 on 2013.


Peter Swerling is best known for the class of statistically “fluctuating target” scattering models he developed in the early 1950s to characterize the performance of pulsed radar systems, referred to as Swerling targets. He noted that the return radar echoes were noisy because of semirandom reflections from different parts of the aircraft because of the changing aspect of aircraft relative to the radar transmitter. There were different kinds of fluctuations due to target shape and size, radar wavelength, and so on. Some fluctuations would occur pulse to pulse, and others would vary more slowly, such as from scan to scan of the antenna. In fact, his early work led to the design of modern stealthy aircraft. The noisy radar echoes were successfully modeled as a constant plus a random number with memory. In terms recognized by traders, the echoes were modeled as an exponential moving average (EMA) passes numbers. The time constant of the EMA was different for the various models, and more complex models included several EMAs. The Swerling model is entirely consistent with the 1/F α spectral model that uses random inputs with long-term memory.

Since there has been a mountain of opinion regarding the randomness of the market, it is reasonable to apply a Swerling-like model toward the generation of synthetic data. The result is subjective, but appears to be a reasonable approximation to real market movement. There is no relationship between the real prices and the synthetic prices. Since random numbers are used, the display will change every time the indicator is computed. Since synthetic prices created by taking an EMA of random numbers are a reasonable approximation to real market prices, the prices can be viewed as random numbers with memory. A logical extension is that we can gain insight into market activity by correlating current prices with prices in the recent history to take advantage of the memory part of the model. At least that was Dr. Ehlers premise.

Key Signal

Cls--> Synthetic Close Prices
Hgh--> Synthetic High Prices
Lw --> Synthetic Low Prices
Opn--> Synthetic Open Prices

Pros and Cons

I am sorry this script is NOT 100% as original Ehlers works but I modified it accordingly which demostrated with better visual effect.


The 46th script for Blackcat1402 John F. Ehlers Week publication.

Courtesy of @ midtownsk8rguy for random number generation.


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