Rocket Science for Traders: Digital Signal Processing Applications

I think this is a very interesting book for people who have some knowledge of digital signal processing, although it is not at all public. In particular, I’m doing something similar to my specialty nuclear magnetic resonance (NMR) data processing, so I think this is a fun book for people in this field.

This is an exciting book, full of many good ideas. However, there are quite a few technical errors in the mathematics.
There are also some perplexing explanations in the early stages of the book. These compromise the good ideas that the author expresses. I also think it is a bit of a stretch for the author to say that the “easy language code” is easily portable to bacic, C++ or Excel since a few of the commands in his code would not work in these contexts. If one uses his comments on the code, these can be worked around.

I’m far from a mathematical genius, so I purchased the book with some concerns about it being too technical. However, I found I could easily understand the end results without having to understand the detailed math. In my view, you only have to find one indicator that is more responsive for you to deem this a prudent purchase. While there are many valuable indicators described in the book (with the requisite Trade Station Easy Language Code included), I found the automatically adaptive stochastic indicator to be the most helpful to me.

I think this book is great even for non-math people. In fact, I am not good at math at all. I read it a couple of times and figured out what the author wanted to say.

This book is especially good for people who are interested in creating their own trading systems.

John Ehlers has been applying concepts and learnings from the sciences (electronic cycle and wave theory and physics) to developing trading indicators since the early 80’s. Every broker’s terminal has Stochastics, developed by George Lane and nearly every “tool box” charting program includes Gerald Appel’s MACD, John Bollinger’s Bands, Welles Wilder’s ADX, RSI, parabolic and so on. These tools can all be useful …. But none come close to matching the originality of John Ehlers’ work with cycles and the development of MESA (Maximum Entropy Spectral Analysis) as a market trading tool.
The concepts used by Ehlers are very sophisticated and have never before been applied to trading, which is why they work. While his concepts take some effort to develop a full understanding, in “Rocket Science” Ehlers describes the indicators and systems very concisely, does not belabor useless scientific details, but rather acquaints the reader with the overall concept and then quickly moves to a discussion of how the indicator can be used in trading.
In Rocket Science Ehlers not only provides several cycle-based indicators and a couple trading systems, but he also provides all the TradeStation code (also available for a small charge on his website: […]
Ehlers has also updated his earlier book: “MESA and Trading Market Cycles” which I look forward to receiving soon.

Fine book for what it is, but this is just not the right technique for systematic trading because the models proposed are misspecified for the signal over the time series (as another reviewer pointed out, price time series do not conform to the conditions of electrical and telecommunications signals).

Still, many of the skills needed to isolate real signals and deploy real strategies are built through exercising with these methods, so all is not lost if you wade through this, deploy something, and come back with knowledge but little cash.

Who is the book not for: phynance-lite Excel-based users.

Who is the book for? Do you use Matlab or Mathematica or Maple? Do you know what an Active X link is for data feeds? Do you look at the tick data of the currency and swaps market and see gold? Are you laughing at me because these questions are inefficient baby-level stuff? (Hint: you’ve outgrown this book).

Whoever reads the reviews for this book will note the polarity: people either think it’s wonderful or it’s horrid. I’ll try to give a more balanced review here.
* This book is for the mathematically/analytically inclined. If you don’t consider yourself in this category, I would not suggest this book. At the VERY least you should have a solid background in trigonometry.
* This book is exactly what is says: Digital-Signal Processing (DSP) applied to stock trading. I myself am an Electrical Engineer who’s day-job consists of about 90% DSP-work / 10% other tasks. For this reason, I believe I can fairly say that the DSP concepts presented are done so in a fairly clear and fairly accurate manner (this varies from time-to-time).
* Most of the concepts presented in Ehlers’ book would be what I consider “traditional” DSP. There is a problem here (that is almost completely overlooked in the book): “Traditional” DSP is based on a series of assumptions that must be at least approximately fulfilled. Recent academic research has tended to show that stock-market “signals” tend NOT to fulfill these assumptions very well. In some ways, this puts a significant dent (in my view) in the theory used as the basis for the indicators derived.
* The attention to detail at times is very obtrusive to a reader with a keen eye and understanding of what is being described. For example: there is (what I consider to be) a glaring error in the MAMA filter that no one has ever pointed out and that is not corrected on his website. How has this escaped notice for so long? [Side note: be careful about his claim that MAMA’s avoid whipsaws – they DON’T at all in ranging markets!]
* Two mechanical systems are described in detail in the book: the SineTrend Automatic System and the ZeroLag Intraday System. I have EXTENSIVELY tested both systems, exactly as described in the book, on a very-wide range of stocks, commodities, and currencies. These simulations were carried out using a test suite I had developed for my own use to simulate trading conditions as realistically as possible. This includes conservative, but realistic allowances for slippage, commissions ($15 round-turn), and signal reaction.
Ehlers results for the SineTrend Automatic System grab your attention in the book (greater than $100,000). However, no initial investment is listed in the book and one should be careful to note that these results are over a 15 year period. Assuming a $10000 initial investment (though this isn’t specified in the book), this is a 17% annual return. Not bad, not great.
The REAL problem here is that a more realistic simulation shows that one is hard-pressed to show ANY profit on ANY type of stock/commodity/currency. I’ve tried the system (unaltered) on dozens of instruments, with a couple rather moderate successes and the rest losing money terribly, even with reasonable stop losses and money management.
* Almost (if not all) of Ehler’s graphs in his book are from the same time series: specifically the US96H (March 1996 Treasury Bond contracts). I HAVE been able to reproduce all of the graphs in his book using the indicators: so there is no falsification in them, as implied in other reviews. However, the time period under consideration shows a series with nearly ideal characteristics for Ehlers systems, while almost all other series I’ve tested his indicators and systems on do not exhibit the same performance.
* MOST ALL of the information presented in his book is available for FREE download on his website as Word DOCs. There is also a lot of other papers he has written available on the site.
* Ehlers is doing what I think needs to be done in the trading industry: trying new techniques and methods. He has a good grasp of the electrical-engineering concepts and how to apply them to trading, but the results presented in his book are NOT indicative of TYPICAL results of the performance of his systems. The ideas and the theory behind them are, generally, good, though he is a bit prone in parts to handwaving and glossing-over of some obvious pitfalls (obvious, at least, to another electrical engineer).
* For the mathematically-inclined who enjoy working on their own ideas and own systems, this book could give you a lot of insight into technical trading and provide some good jumping-off points to developing systems that are TRULY profitable. I have yet to see (or develop) one that I would be willing to risk real money on and I would caution readers from thinking that either of the two systems presented will provide the type of profits described in the book.
To all others (probably the vast majority of those interested in this book!) I would say be very careful before spending your money on this. There is no reliably turn-key system provided in this book, even though there are two that are purported to be such.

Finally a book on trading that is completely different from all the others I have read. If you are getting the unhealthy feeling that 99% of all the indicators and techniques you are using, or came with your charting package, are minor variations on the same tired theme, then you should get this book.
Note: do not be put off by the math in the book. If you just skip what you don’t understand, and I skipped a lot, there is enough informative pure text for you to get most of the benefits of the ideas that are put across in this fine text. In addition there are a couple of complete trading systems and a plethora of new and innovative indicators for which you are given the complete TradeStation Easy Language code….

I’ve read lots of books on trading, all of them using the balance between the bulls and the bears, their psicology, who’s stronger and how this affects the market. Some of these books are absolutely genial.
This book gives a completely new view about the market. At least new to me. Interpreting the market as a signal (just as if it were radio signal, or whatever) and processing the results gives surprising results. In some cases these results are not very different from the traditional indicators, but in others results are incredible. In any case the arsenal of new tools opens possibilities to increase the effectiveness of trading and you can choose which tools fit your trading. You can find at least one, for sure. Well, at least I found some.
No panacea here. No miracles. But interesting and effective new point of view and tools.

Great Book! Reading “Rocket Science for Traders” was like taking a fresh breath of air. I devoured it over one weekend and have read and studied some chapter portions two or three times since my first reading. Over the years I’ve read most of the best and highly recommended technical analysis books and studied the various indicators that are being used and sometimes touted. However, I have consistently come away feeling that so many people pursuing technical analysis are not very technical at all. For example, a well known and widely used indicator takes the standard deviation of price data and uses it. Price data, however, is not “normal” or Gaussian distributed. Therefore, the standard deviation, as calculated, is mis-applied and what results is not an accurate variance measurement around the price mean or average as it is intended to be.
In his book, John Ehlers has provided us, a set of indicators, systems and concepts that are sound conceptually, mathematically and fundamentally proven. The tools that he presents are accepted, in science and engineering, around the world as some of the best that we have in which to model discrete and sampled data systems like the stock market. His book has helped confirm some of my ideas and I have enhanced the effectiveness of my systems with the use of his little and no lag processes and models.
I have a strong engineering and math background and the book to me was a “God send” because the theory, examples and EasyLanguage code were all given and well presented. However, I believe a beginner and any serious trader or student will likewise significantly benefit from John’s book. That’s because its easy to read, i.e., the concepts and applications are clearly explained in plain english. You don’t have to do any math or understand the math or derivation concepts to use and apply the indicators and systems. Also, as mentioned above, the EasyLanguage code is provided and also easy to read and understand.

5 star no review