Empirical Mode Decomposition (EMD) Bands
period = 20 (5–100) • delta = 0.5 (0.1–2) • fraction = 0.1 (0.01–0.5) Overview
EMD Bands is a sophisticated trading indicator that applies Empirical Mode Decomposition principles to create adaptive bands around price action. Developed as a practical trading tool based on Huang's EMD theory (1998), this indicator generates three dynamic bands that adapt to market conditions more effectively than traditional fixed-parameter bands like Bollinger Bands or Keltner Channels. The bands are computed using empirical decomposition of price extremes, capturing the natural oscillation patterns inherent in market data.
The indicator calculates upper and lower envelopes through an adaptive sifting process that identifies local maxima and minima over the specified period. The middle band represents the empirical mean of these envelopes, providing a dynamic equilibrium line. The delta parameter controls band width sensitivity, while the fraction parameter fine-tunes the smoothing applied during decomposition. This results in bands that expand during volatile periods and contract during consolidation, offering traders clear visual cues for support/resistance levels and mean reversion opportunities.
Interpretation & Trading Signals
Band Interpretation:
- Upper Band: Dynamic resistance level, potential overbought zone when price touches/exceeds
- Middle Band: Equilibrium line, acts as dynamic support/resistance and trend direction indicator
- Lower Band: Dynamic support level, potential oversold zone when price touches/falls below
- Band Width: Indicates market volatility - wider bands suggest higher volatility
Trading Signals:
- Mean Reversion: Buy near lower band, sell near upper band when price returns to middle
- Breakout Trading: Strong momentum when price breaks and holds above/below bands
- Trend Following: Middle band slope indicates trend direction, trade in that direction
- Squeeze Patterns: Narrow bands indicate consolidation, expect volatility expansion
Parameter Optimization:
- Period: Shorter periods (5-15) for scalping, medium (20-50) for swing trading, longer (50-100) for position trading
- Delta: Higher values (1.5-2.0) create wider bands for volatile markets, lower (0.1-0.5) for ranging markets
- Fraction: Lower values (0.01-0.05) for more responsive bands, higher (0.2-0.5) for smoother bands
- Timeframe: Works best on higher timeframes (4H+) where EMD decomposition is more meaningful
Example Usage
Code examples will be available once the Rust implementation is complete.
Performance Analysis
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