Profitable Trading with Hurst Cycles

A simple strategy for using Hurst cycles to achieve consistent profits

JM Hurst published his cyclic principles in the 1970’s, and for more than 40 years they have stood
the test of time as financial markets around the world continue to exhibit cyclic behaviour, beating
with the rhythm of the cycles identified by Hurst so long ago.

One of the difficulties many Hurst analysts have struggled with is in making clear trading decisions
on the basis of their analysis. Fortunately there is a simple solution: one of the cyclic tools that Hurst
defined was the FLD (Future Line of Demarcation). This simple line provides consistently profitable
trading opportunities if it is traded in the right way, using an approach that I call the “FLD Trading
Strategy”.

Of course you could get complicated about trading Hurst Cycles if you really want to, but it isn’t
necessary. The FLD trading strategy is so simple that you could start trading it in a matter of days.

Hurst Cycles
If you are going to be making trading decisions based upon Hurst Cycles, then you should have some
basic understanding of what Hurst Cycles are and how they influence the price movements that you
are trading. Here is a crash course in Hurst cycles to get you started:

 Basic concepts
o There are multiple cycles which work together to influence price to move up and
down.
o These multiple cycles have wavelengths that have a simple relationship to each
other: wavelengths that are two or three times as long as the shorter cycle.
o The wavelengths of the cycles constantly vary. Each wave of a cycle might be longer
or shorter, but over time the average wavelength for that cycle is constant.
o The multiple cycles form troughs at the same time. In other words their troughs are
synchronized.
 Phasing analysis

That is a fancy term for the analysis process, which involves figuring out two things:

 what the current wavelength is for each of the many cycles that move the markets,
 and when each cycle most recently formed a trough.
 Hurst diamonds

Once a phasing analysis has been performed the positions of the cycle troughs are
marked on a chart below price using diamond symbols.

 Underlying trend

This is the combined effect of all cycles longer than the cycle you are considering, and is
expressed as a simple integer. If a cycle is moving up then it is counted as +1, if it moving
down it is counted as -1. And so for instance if you are considering the 20-day cycle then
the underlying trend is the sum of the direction of the 40-day, 80-day, 20-week, 40-week
(and so on) cycles.

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  Nominal model

This is another fancy term. It is basically simply a list of the cycles that influence the price
movement of a financial market. OK, it is a bit more than simply a list: it also gives the
average wavelength of each cycle. The Nominal model that Hurst found in the US stock
markets that he studied (and which is still used today) consists of these cycles: 5-day, 10-
day, 20-day, 40-day, 80-day, 20-week, 40-week, 18-month, 54-month, 9-year & 18-year.

There is a lot more to it of course, but that is all you need to get started (you can learn more at
http://sentienttrader.com).

The FLD
Hurst defined a cyclic tool called the Future Line of Demarcation (FLD). This is a simple line: It is the
median price shifted half the current wavelength for the cycle you are interested in (plus one bar) to
the right. For example, if the current wavelength of the 20-day cycle is 18 days (remember
wavelength varies), then the 20-day FLD is the median price displaced 10 days to the right.

Hurst explained that FLDs provide three pieces of information:

 When price crosses an FLD the formation of a trough or peak of the cycle the FLD is based
upon is confirmed.
 When price crosses an FLD a price target can be generated to the next peak or trough of the
cycle the FLD is based upon.
 When the FLD itself forms a peak it indicates an area (of time) where price is likely to form a
trough and vice versa.

Here is a simplified diagram of price crossing an FLD, with the three pieces of information shown
graphically:

Figure I: Simple FLD and Price interaction

Multiple Cycle FLDs

Something which always bothered me as I was learning to trade with Hurst Cycles was that
sometimes price would cross an FLD perfectly, as expected from the above diagram, but sometimes

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quite the opposite would occur and price would touch the FLD, then not cross it. The FLD would
seem to provide support (if beneath price) or resistance (if above price).

Then I realized that the interaction between price and an FLD is more complex than the single cycle
interaction presented in Hurst’s original theory. We know that one of the basic tenets of Hurst
Cycles is that there are multiple cycles which influence the markets. So how does the FLD interact
with price when that price line is not constructed as a single cycle, but as the combination of
multiple cycles?

And how many cycles do we need to combine to produce a line that resembles price action closely
enough? I discovered that in fact the pattern of interaction between price composed of only three
cycles is a pattern that is clearly present in all financial markets.

It is a pattern that is particularly evident in the markets if the shortest cycle is the 20-day cycle. Here
is a graphic representation of how price, influenced by three cycles (20-day, 40-day and 80-day),
interacts with the 20-day FLD:

 Price (solid blue line)

 20-day FLD (dashed pale blue line)
 20-day Cycle (pale blue line)
 40-day Cycle (pink line)
 80-day Cycle (yellow line).

Figure II: Multiple cycle FLD and Price interaction

Each time price interacts with the FLD it has been marked with an arrow to indicate the direction of
the interaction (the direction in which price is travelling) and each interaction, or FLD Cross, is
labeled as category A to H.

You will notice immediately that not all interactions between price and the FLD are equal.

 Category A, D, E and F are all genuine crosses.

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  Category B and C and category G and H represent periods of time when either price will
track along the FLD, bounce off the FLD, or simply reach towards the FLD and then move
away without crossing.

Trading the FLD

So how should we trade the FLD? Each interaction between price and the FLD is a trading
opportunity. When price reaches the FLD we would enter a trade, if we are expecting price to cross
the FLD (such as occurs at category A, D, E & F interactions). When we do not expect price to cross
the FLD we do not enter a trade. Here is a chart of the Dow Jones Industrial Average (YM futures
contract), showing the same interactions as are presented in the above diagram:

 The 20-day FLD is the purple line (readily identifiable as median price displaced to the right).

Figure III: Price and FLD interaction in the price movement of the DJIA

Notice how price tracks along the FLD between interaction B and C, and how at interaction G price
reaches towards the FLD but doesn’t quite touch it. This is exactly what we expect. Whether price
reaches towards the FLD or tracks along it is the result of the influence of other cycles and the fact
that markets are not “perfect” (they’d be no fun to trade if they were).

And so in essence trading the FLD is very simple:

 We enter into long trades at the level of the 20-day FLD when we expect a category A or E
interaction between price and the FLD
 We enter into short trades at the level of the 20-day FLD when we expect a category D or F
interaction
 We do not enter into a trade when we expect a category B or G interaction
 If possible (and we are given the opportunity) we do enter a long trade when we expect a
category C or a short trade when we expect a category H interaction.

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Position Sizing and Money Management
Now that we know where and when to enter the trade we need to calculate how big a trade we
should make. You could use any sensible money management approach, but here are a few things to
consider:

 The initial stoploss for a trade should be a few points below the trough (or above the peak)
preceding the interaction that you are trading.
 Decide how much of your trading capital you are willing to risk on the trading opportunity,
probably about 2 - 3%. Your position size is determined as the size of trade that would result
in this loss if it went straight to the initial stoploss.
 Adjust the amount that you are willing to risk according to the underlying trend of the cycle
you are trading. If the underlying trend is positive and the trade is long then you could
increase your position size because you expect the longer cycles to support a bullish move.
Conversely if the underlying trend is negative and the trade is short then you should reduce
your position size and take less risk because the longer cycles are working against you.
 Bear in mind that financial markets tend to move with a great deal in common (Hurst’s
Principle of Commonality), and avoid increasing your risk by taking the same trade in several
highly correlated markets.

Exiting from the trade

A complete trading strategy does not consist of merely an entry strategy. You need to know when to
exit from the trade. There are many different approaches, and when trading cycles it important to
work with an approach that allows you to profit even when the analysis you are working with is not
entirely correct, and even if you incorrectly identify the category of trading.

One such approach is a single-in, scale-out process which works as follows: we make three trades for
every trading opportunity. Each of the three trades is entered at the same price and they are equal
in size (hence the term single-in). The three trades are potentially all exited (or closed) at three
different levels, which is called scaling-out.

The rules for exiting are as follows :

 All trades have an Initial Stop Loss as described above.

 All open trades are exited at the level of the FLD if price and the FLD are forming their next
interaction.
 Trade One (of the three) is exited at a level (T1), which is halfway between the entry price
and the target generated by the price cross of the FLD.
 Trade Two is exited at the level (T2) of the target generated by the price cross of the FLD.
 Trade Three exits at the level of a simple 3-bar trailing stop after the target T2 has been
reached.

Join the Hurst Trading community

Trading any strategy on your own can be daunting. The best way of getting started is to benefit from
a community of traders who are applying the strategy successfully. Please join us at Hurst Signals, an
online service which performs the phasing analysis, identifies the price and FLD interactions and
emails you the trading opportunities. And best of all, it is a community of successful Hurst Cycle
traders.

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Learn more about Hurst Signals here: http://sentienttrader.com/hurst-signals

David Hickson has been trading financial markets for over 20 years. He created Sentient Trader
(http://sentienttrader.com), a software application which analyzes any financial market using the
exact process presented by Hurst. Sentient Trader is the leading Hurst Cycles software package used
by professional and private traders in 48 countries around the world. David also created the Hurst
Signals service (http://hurstsignals.com): an online service which identifies trading opportunities
using the FLD Trading Strategy.

David can be contacted at david.hickson@sentienttrader.com