The following information is extracted from: "MESA vs Goertzel-DFT, 2003 by Dennis Meyers"
MESA which stands for Maximum Entropy Spectral Analysis is a widely used mathematical technique designed to find the frequencies present in data. MESA was developed by J.P Burg for his Ph .D dissertation at Stanford University in 1975. The use of the MESA technique for stocks has been written about in many articles and has been popularized as a trading technique by John .
The Fourier Transform is a mathematical technique named after the famed French mathematician Jean Baptiste Joseph Fourier 1768-1830. In its digital form, namely the discrete-time Fourier Transform (DFT) series, is a widely used mathematical technique to find the frequencies of discrete time sampled data. The use of the DFT has been written about in many articles in this magazine (see references section).
Today, both MESA and DFT are widely used in science and engineering in digital signal processing. The application of MESA and Fourier mathematical techniques are prevalent in our everyday life from everything from television to cell phones to wireless internet to satellite communications.
MESA Advantages & Disadvantage
MESA is a mathematical technique that calculates the frequencies of a time series from the autoregressive coefficients of the time series. We have all heard of regression. The simplest regression is the straight line regression of price against time where price(t) = a+b*t and where a and b are calculated such that the square of the distance between price and the best fit straight line is minimized (also called least squares fitting). With autoregression we attempt to predict tomorrows price by a linear combination of M past prices.
One of the major advantages of MESA is that the frequency examined is not constrained to multiples of 1/N (1/N is equal to the DFT frequency spacing and N is equal to the number of sample points). For instance with the DFT and N data points we can only look a frequencies of 1/N, 2/N, Ö.., 0.5. With MESA we can examine any frequency band within that range and any frequency spacing between i/N and (i+1)/N . For example, if we had 100 bars of price data, we might be interested in looking for all cycles between 3 bars per cycle and 30 bars/ cycle only and with a frequency spacing of 0.5 bars/cycle. DFT would examine all bars per cycle of between 2 and 50 with a frequency spacing constrained to 1/100.
Another of the major advantages of MESA is that the dominant spectral (frequency) peaks of the price series, if they exist, can be identified with fewer samples than the DFT technique. For instance if we had a 10 bar price period and a high signal to noise ratio we could accurately identify this period with 40 data samples using the MESA technique. This same resolution might take 128 samples for the DFT. One major disadvantage of the MESA technique is that with low signal to noise ratios, that is below 6db (signal amplitude/noise amplitude < 2), the ability of MESA to find the dominant frequency peaks is severely diminished.(see Kay, Ref 10, p 437). With noisy price series this disadvantage can become a real problem. Another disadvantage of MESA is that when the dominant frequencies are found another procedure has to be used to get the amplitude and phases of these found frequencies. This two stage process can make MESA much slower than the DFT and FFT . The FFT stands for Fast Fourier Transform. The Fast Fourier Transform( FFT ) is a computationally efficient algorithm which is a designed to rapidly evaluate the DFT. We will show in examples below the comparisons between the DFT & MESA using constructed signals with various noise levels.
DFT Advantages and Disadvantages.
The mathematical technique called the DFT takes a discrete time series(price) of N equally spaced samples and transforms or converts this time series through a mathematical operation into set of N complex numbers defined in what is called the frequency domain. Why would we what to do that? Well it turns out that we can do all kinds of neat analysis tricks in the frequency domain which are just to hard to do, computationally wise, with the original price series in the time domain. If we make the assumption that the price series we are examining is made up of signals of various frequencies plus noise, than in the frequency domain we can easily filter out the frequencies we have no interest in and minimize the noise in the data. We could then transform the resultant back into the time domain and produce a filtered price series that hopefully would be easier to trade. The advantages of the DFT and itís fast computation algorithm the FFT , are that it is extremely fast in calculating the frequencies of the input price series. In addition it can determine frequency peaks for very noisy price series even when the signal amplitude is less than the noise amplitude. One of the disadvantages of the FFT is that straight line, parabolic trends and edge effects in the price series can distort the frequency spectrum. In addition, end effects in the price series can distort the frequency spectrum. Another disadvantage of the FFT is that it needs a lot more data than MESA for spectral resolution. However this disadvantage has largely been nullified by the speed of today's computers.
Goertzel algorithm attempts to resolve these problems...
What is the Goertzel algorithm?
The Goertzel algorithm is a technique in digital signal processing (DSP) for efficient evaluation of the individual terms of the discrete Fourier transform (DFT). It is useful in certain practical applications, such as recognition of dual-tone multi-frequency signaling (DTMF) tones produced by the push buttons of the keypad of a traditional analog telephone. The algorithm was first described by Gerald Goertzel in 1958.
Like the DFT, the Goertzel algorithm analyses one selectable frequency component from a discrete signal. Unlike direct DFT calculations, the Goertzel algorithm applies a single real-valued coefficient at each iteration, using real-valued arithmetic for real-valued input sequences. For covering a full spectrum, the Goertzel algorithm has a higher order of complexity than fast Fourier transform ( FFT ) algorithms, but for computing a small number of selected frequency components, it is more numerically efficient. The simple structure of the Goertzel algorithm makes it well suited to small processors and embedded applications.
The main calculation in the Goertzel algorithm has the form of a digital filter, and for this reason the algorithm is often called a Goertzel filter
Where is Goertzel algorithm used?
This package contains the advanced mathematical technique called the Goertzel algorithm for discrete Fourier transforms. This mathematical technique is currently used in today's space-age satellite and communication applications and is applied here to stock and trading.
While the mathematical technique called the Goertzel algorithm is unknown to many, this algorithm is used everyday without even knowing it. When you press a cell phone button have you ever wondered how the telephone company knows what button tone you pushed? The answer is the Goertzel algorithm. This algorithm is built into tiny integrated circuits and immediately detects which of the 12 button tones(frequencies) you pushed.
- Bartels test for cycle significance, testing output cycles for utility
- Hodrick Prescott Detrending, smoothing
- Zero-Lag Regression Detrending, smoothing
- High-pass or Double filtering of source input price data
1. Burg, J. P., ëMaximum Entropy Spectral Analysisî, Ph .D. dissertation, Stanford University, Stanford, CA. May 1975.
2. Kay, Steven M., ìModern Spectral Estimationî, Prentice Hall, 1988
3. Marple, Lawrence S. Jr., ìDigital Spectral Analysis With Applicationsî, Prentice Hall, 1987
4. Press, William H., et al, ìNumerical Receipts in C++: the Art of Scientific Computingî,
Cambridge Press, 2002.
5. Oppenheim, A, Schafer, R. and Buck, J., ìDiscrete Time Signal Processingî, Prentice Hall,
6. Proakis, J. and Manolakis, D. ìDigital Signal Processing-Principles, Algorithms and
Applicationsî, Prentice Hall, 1996., pp480-481
7. Goertzel, G., ìAn Algorithm for he evaluation of finite trigonometric seriesî American Math
Month, Vol 65, 1958 pp34-35.
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