Cycles – Part Three - By Profit Max Trading

And example of a fixed cycle pattern can be found on this daily Canadian Dollar chart below. Starting from a predominate top you can see that a market trend change occurs on the daily chart every 15 days.

If this pattern continues, we should see another turn come January 30, 2004. But if you notice the pattern leading to the top where I started this count, there was no obvious 15 trading day cycle turn. And very soon it will disappear again. Perhaps it will stick around long enough for a turn on 1/30 before going away, or perhaps it is as good as gone now. The point is that fixed cycle counts have very limited use and cannot be consider reliable in matters of forecasting.

Okay, so up to now we know that there are fixed cycles found within the market pattern we see on the price chart. Then why is it that they come and go? And why does the chart patterns not appear as an even repetition of tops and bottoms?

The answer to these questions can be summed up into one answer: The market pattern you see on the price chart is the SUMMATION of multiple fixed cycles of different frequencies.

In analog electronic terms, the resulting output formed by combining several dissimilar frequencies (cycles per second – aka Hertz) is called DISTORTION. Although distortion is very important for creating amplifiers in analog circuitry, it does make timing tops and bottoms on the price chart much more challenging.

So where do all these cycles come from? Well, I could go into the subject of how some planets influence our seas and crops. I could also go into how they affect our moods (which would affect buy/sell decisions for example) such as the moon (Latin for moon is Luna, root for Lunatic).

However, I do not wish to open that can of worms here. Rather, you should be able to realize that cycles are all around us and affect everything we do. For instance, our weather goes through a cycle change. We have the cycle of day and night, the cycle of seasons, harvest cycles, business cycles, rain cycle, the yearly cycle, slaughter cycle, inflation cycle, recession cycle, etc.

Each of these various cycles has a different time (wave) length (called frequency). Alone each of these is easy to map and determine when the next wave will occur. But if you combine them together (summation), what you get is distortion that looks just like the patterns found on your price chart.

The reason that each market has a different pattern is some markets are more sensitive to certain cycles than others. For instance, weather cycles will have a greater affect on the grains than it will on the Currencies. Business cycles, inflation cycles and such will have a greater affect on the Indexes and Currencies than it will on the Meat markets. But even though the weather cycles may have a great affect on grains than perhaps the Meats, the Meats will be also be affected by weather cycles either directly or indirectly because of the connection between the Meats and the Grains. Are you starting to see how this works?

To take advantage of this knowledge requires that you first acknowledge that cycles exist in the marketplace. It then requires that you learn to de-trend the pattern in order to isolate the various fixed cycles that make up the composite. We will continue this in Part Four.