Market Timing Profits Using Cycle Analysis
Short-term traders, especially those that are Day-Trading, must have theability to execute precise timing.
Only those who are able to effectively time the markets with strongdiscipline can win the battle against the markets and emerge victorious.
The success rate in trading the markets, whether it be Futures andCommodities, Stocks or the Forex is very low. Only a few collect the moniesinvested or traded by the many.
The trader must keep in mind that in order for there to be a winner therehas to be one or more losers in the business of trading. Therefore, the sharperyou can get your market timing skills and emotional resolve the better off youwill be.
This brings us to the subject of Cycle Analysis.
Market price behavior can be described as a combination of simple cycles,each different in both the period (cycle length) and the amplitude. Each ofthese are operating independently of each other, more or less. This phenomenais not a new concept but has been thoroughly studied. One such example would bethe works of J. M. Hurst, a recommended author on this subject.
You may find this surprising to learn that some of the commonly usedtrading indicators that many traders plot on their price charts are built onthe foundation of cycles. For example, consider the Stochastic, the relativestrength index (RSI), moving average convergence divergence (MACD), andmultiple moving average (MMA) indicators. These indicators oscillate from a lowbase value to a high base value over and over again, with various oscillations(time spans). They help the trader get a sense as to where the market is likelyto go next.
During the 1990's when I was most active on trading forums, you would findsome traders engaged in timing the markets based on some fixed-cycle interval.For example, you might note on the Lean Hogs chart that it was making a bottomabout every 15-days, approximately. So having discovered this, you might waituntil another 15-days (approximately) elapsed in order to time the next bottomand jump into a long trade.
While locating these fixed-cycle periods in the different markets was easyto do when they showed up, many traders would get burned jumping into the tradeat the next interval due only to find that the pattern had disappeared,resulting in big losses.
The problem with this type of cycle analysis is that it focuses on a singlecycle, when in reality market price action is the result of several cyclescombined. So while a single cycle may prove the dominant one for a short periodof time, it will soon appear to vanish as the other cycles with their combinedyet different periods project a different pattern. If a market only tradedbased on a single fixed-interval, everyone would lock onto it and no one wouldtake the opposite side of your trades, thus no more market.
The key to cycle analysis is to find the most dominant cycle periods thatare affecting a particular market and then align them correctly so that you candetermine their respective amplitudes (price values) for each time period. Somecycles will be in their upward swing (positive values) and some in the negativeswings (negative values). When summed up for any time period (the negativevalues will subtract from the positive ones), you get a composite value.Plotted on a chart, you should get basically the same swing pattern that theprice chart itself is displaying.
Due to the element of randomness, no de-trending method exists that willprovide a perfect comparison to current or future price action. But when itcomes to trading, you do not need perfection, or a very close approximation.
To get a visual idea of what this might look like, simply plot aStochastic oscillator onto your price chart. Note how it makes cycle swing topsand bottoms as the market does. New traders often get excited the first timethey use this indicator, thinking that they've found the Holy Grail to markettiming. Unfortunately, there are times this oscillator will get pegged at theroof (overbought) or the basement (oversold) for long periods of time. Thereason for this is that the Stochastic is locked into a shorter-time period(cycle length) and several of the other cycles at work have aligned in the samedirection (upwards or downwards) to overpower the one you are locked into. Atsome point it will return and start oscillating again. The lesson here is thatyou need to be aware of most of them, not just one.
By de-trending market price in order to arrive at the component parts (2-3would be enough), you would then have the basis for plotting out when the nextbottom or top is most likely to occur and use that towards your market timingof trades.
If you find this information enlightening or encouraging and would like tolearn more, I would suggest reading the material from J. M. Hurst and W. D.Gann to get a good foundation on the subject.
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