Indentifying Entries, Exits, and Stops

Finally, look at the prediction itself. Naturally, if you decide to trade, you want to put your long positions on near the trough of a cycle, and put your shorts on near the top. In addition, the prediction makes explicit your expectations about where prices will go, allowing you to set stops with some precision, and to define when you will begin to consider exiting the trade if the cycle does not develop as expected.

An important point to keep in mind is that, in Ehlers’ words, “The MESA [standard] prediction is more successful predicting the timing of turning points rather than the level at which the turning points occur” (MESA and Trading Market Cycles, p. 110). So from a MESA point of view, it’s a neutral indicator if the price level of a predicted cyclic trough or peak does not remain consistent from bar to bar; but if as a chart develops, a predicted trough or peak moves, that is a bad sign. Ehlers suggests back-testing the prediction for 3 to 5 bars before the current bar. If the turning point stays in the same place in the prediction, this is a sign of reliability. If it doesn’t, this is a negative sign and probably corresponds to negative indications in the other MESA studies.