Look closely at your charts and their trendlines. The paired axes of those lines define a wholly unsuspected set of functions related to price cycles. The time value of each of those price cycles must always have an identically corresponding value between the paired axes, unless your lines are parallel. But to find that value — to look into the future — you must convert time to price, which means rotating time value 90 degrees to vertical so that it becomes price value. Complicated? Not at all. You can do it easily with most drawing or charting programs, or even with a simple ruler.
To begin, a Forward Looking Information Radar (FLIR) point is an inflection point that comes in three flavors. FLIRs most often mark reversals from a current trend or mini trend. They also (occasionally) mark momentum change from trending to sideways motion. They also (rarely) mark momentum changes with continuation of current trend at a much steeper angle. And, of course, there’s FLIR failure (and, as such, not really a type of FLIR). Some FLIR examples can be seen in “FLIR or No FLIR?” (below).
You can use Microsoft Paint, or msPaint, to find FLIRs. If your charting program allows you to measure distances and draw and rotate lines 90 degrees, that works as well. Keep in mind that creating FLIRs graphically (with chart and ruler or with a drawing program), rather than mathematically, carries an inherent risk, mainly because measurements may be slightly off.
Here are the steps for determining FLIR points.
Step 1: Set your chart so that you have 20 or 30 bars of blank space to the right to accommodate your prognostication. Do not include any studies.
Step 2: Draw your trendlines, extending them as far to left and right as possible.
Step 3: Create a scale. Do this by measuring the distance from one bar to the next. (A 50-bar scale is often adequate.) Bar widths may vary from chart to chart, so always check your scale for accuracy if re-using it. Copy, paste, and drag your scale so that its zero-point is exactly at the last bar.
Step 4: Measure the distance between two extremes of a cycle, say a low and the next low or more extreme low. Draw a vertical line equal to that distance. Drag the vertical line until it exactly fits between the paired axes of your support and resistance lines out in the future. This marks your FLIR.
Step 5: Look closely to see where your FLIR crosses your scale, or would cross it, if extended. Say the FLIR crosses at 15 on your scale. This means the FLIR should occur 15 periods from the last bar on your chart, plus or minus one period. Count only actual trading days, exclude weekends and holidays.
This simple process works on most charts, but it should be tested for confirmation. Two confirmations are sufficient. To do this, create a couple of vertical lines as described above and fit them between the axes in the part of the chart that has already occurred. They should mark FLIRs. If not, abandon that chart and find another. Some charts simply don’t work. As examples, the stocks Credit Suisse (CS) and Intel Corp. (INTC) seem notoriously difficult to FLIR.
You can use FLIR on charts of almost any duration or instrument type: stocks, forex, daily, weekly, even intraday. One caveat, however: in forex, you may find that FLIR performs well on daily charts, but is virtually useless on short time frames, such as 15-minute charts.
FINDING THE TREND
One question that comes up often is how to draw the original trendlines. The simple answer is that if you look for confirmation, then you will know that these lines resulted in accurate FLIRs, and that’s all that’s necessary.
The number of sets of trendlines is up to you. Often, confirmation will require you to create an extra set or two. What’s interesting is that the extension of any trendlines will still provide a readable framework for FLIR, so even old lines extended into the future will provide forecasts.
Reverse confirmation may seem easier and more confirming. You simply find a top or bottom, then measure the distance at that point between trendline axes, create a horizontal line equal to that length, then drag it around to see if it matches the distance between any pair of highs or lows, or between a high and a low.
During confirmation or beta testing, if you notice that FLIR is consistently off by exactly the same amount of time, you still have a reporting setup. Just adjust your date or time
In FLIR, momentum change with continuation can be deadly. But it need not be feared, as long as you set correct stops or are quick on the trigger. Knowing when it’s happening is pretty easy.
Ideally, the period immediately after a true FLIR should exhibit a higher high than the FLIR (in a reversal to the upside), and a lower low than the FLIR (in a reversal to the downside). If it should be reversing to the upside but instead breaks lower than the low of the FLIR, or if it should be reversing to the downside but instead breaks higher than the high of the FLIR, it’s time to get out because you are almost certainly looking at momentum change with continuation, and it’s going to get volatile quickly. If using stops, you want to set those just above or just below the high or low of the FLIR (see “Stop. Do not pass go”).
It doesn’t matter which tops or bottoms you measure. Any combination should generate a FLIR if you’ve had a couple of successful confirmations. In fact, you need to use different spans so you can generate several forecast points.
On this same subject, not all FLIRs are of equal value. That is, some will only identify mini trends of just two periods — in other words, whipsaws. For safety’s sake, that probably leaves FLIR most often as a short-term scalping tool. So it’s wise policy to exit your FLIR trade the same day or period as you entered. Don’t let greed get the better of you. If the issue shows clear signs of continuing to run in your direction, you can always re-enter.
That said, FLIR does have a distinct propensity for forecasting macro-reversals of considerable duration, even when the forecasted FLIR is technically a failure (the FLIR exhibits neither a higher high nor lower low than the preceding period, nor is it within the plus or minus one-day rule). In “Be it ever so wrong” (left), there’s a clear reversal almost immediately, but sometimes charts dither briefly, with a few small whipsaws, before finally fulfilling the FLIR forecast.
Caution is also advised with weekly and monthly charts. The problem is the slippage issue mentioned earlier. To be off by one period on a daily or intraday chart is usually no big deal because price is relatively stable across one or two such periods. But to be off by one period in a weekly or monthly chart can be unforgiving due to the vast strides that price can make against you in that time. So unless your confirmation shows perfect timing (using the same trendline pair as used in your forecast), you may wish to avoid weekly and monthly charts until you obtain the necessary precision.
FLIR’s accuracy can lead to trader over-confidence, even to the point of trying to trade the FLIR itself. Say you’re looking at a long downtrend when FLIR occurs. You naturally assume that FLIR will mark a reversal to the upside, right? And that may happen, or not. So sometime during the period you pick what you think is a nice low spot at support and go long. But suddenly support is broken and you realize you’ve just caught the Momentum Change Express to Doomsville. Or, let’s say you pick that nice low spot and go long, price duly reverses and puts you in the green but then a funny thing happens: It goes so far green that it makes the FLIR itself dubious (see the fourth example in “FLIR or no FLIR?”). Do you hang on, or take the money and run? You should probably take the money and run. The lesson here is that trading on the FLIR itself is tricky. Wait for the period after the FLIR to enter. Greed can be fatal.
To be sure, using FLIR to make money is a great idea, but FLIR may have a future well beyond this. Earthquake and volcano prediction come to mind, as well as medical applications, fluid dynamics, and environments where strain forecasting may be important to cost saving or life saving, such as in heavy machinery or aircraft components. It will be interesting to see if and how FLIR migrates from investing to other areas.
Dennis Hudson created FLIR. He honed his quant skills at General Electric Co. in the 1960s, in forecasting particle size distributions in diamonds manufacturing. He’s an active options trader and principal of OrangeQuant.com, where he can be reached.