What is a ‘sine wave’
Sine wave is a geometric shape that oscillates (moves up, down or side-to-side) periodically, and is defined by the function y = sin X. in Other words, it represents an s-shaped, smooth wave that oscillates above and below zero.
Breaking down the ‘sine wave’
Indicator sine wave is based on the assumption that markets move in cyclical patterns. After determining the cycle, the trader can try to use a template to design a leading indicator. It works very well when the market really moves in a cycle. When the market is trending, however, this system fails (and you need to configure for this).
Markets alternate between periods of Cycling and trends. Cyclical periods are characterized by a rebound from the support levels or resistance and no breaks or “jumps”. Trending periods are characterized by new highs or new lows and pull back, then continue in the direction of the trend, until exhausted (end).
Sinusoids as analytical tools
Sine wave as the technical analysis tool of charts is based on mathematics and is designed to indicate whether a market is trending or in cycle mode. It helps the trader to determine the beginning and end of trend movement, as well as possible changes in the trend. This figure is also referred to as an indicator of Mesa and was developed by John Ehlers, on the basis of an algorithm which was originally applied for digital signal processing. It consists of 2 lines is called a sine wave and a lead wave. When the price is trending, the lines do not intersect and, as a rule, parallel and separated from each other.
The crossover lines may indicate turning points and generate signals to buy or sell under the right conditions. The indicator can also indicate overbought or oversold market (i.e., unreasonably high or unreasonably low), which may affect current trends. Whether used alone or in combination with other methods or non-correlated indicators (e.g. moving averages), sine waves are very useful for the trader.
The composite Index of Lagging indicators is reminiscent of a sine wave, since the measures that make up the index (i.e. ratios and interest rates) normally varies within a range of values. For example, inflation is always between the specified rates, and if/when inflation meets or exceeds the specified limit, the interest can be adjusted to increase or decrease the value, so it is brought within the target range. Thus, the inflation rate decreases or is unchanged, interest rates will fluctuate up and down to control undesirable levels of inflation.