Cycles – Part One - By ProfitMax Trading
“There are cycles in everything. There are cycles in the weather, the
economy, the sun, wars, geological formations, atomic vibrations, climate,
human moods, the motions of the planets, populations of animals, the occurrence
of diseases, the prices of commodities and shares and the large-scale structure
of the universe.” Ray Tomes’ Cycles
Click-Here if
you may wish to examine this website that discusses Cycles on a deeper
level.
I direct your attention to the above in order that you may have the
opportunity to become acquainted with the subject of Cycles. Because Cycles are
found in EVERYTHING, including price behavior, they can provide futures and
commodity traders with an edge in timing trades.
To take full advantage of cycles in trading requires you either spend a
considerable amount of time and expense to learn how to extract timing signals
for yourself, or you take advantage of a service that provides this information
for a nominal fee. Either way, using cycles to help you time your trades can
provide an edge not found by other means.
There is much information available on the Internet about Cycles that you
may wish to study. One valuable resource page I found a few years ago is called
“Bonnie’s Links”
Click-here to
bookmark this site.
So how can Cycles give a trader the edge? It all comes down to
‘timing’. If a trader is able to determine with accuracy beginning of a new trend or perhaps end of a trend correction, the trader can then enter the market at a price that presents low risk exposure with
excellent opportunity for gain. One reason many are unable to profit from
trading is that they have been entering trades too early or too late as well as
not knowing where to place their protective stops. If a trader had a very good
idea as to where the market was likely to reverse, there would be little
question as to where to place the protective stop and where to enter the trade.
Of course having this timing edge is only a part of the overall scheme of
things. Others include managing the trade once it enters profit territory and
have the mental fortitude to stick to a trading plan. But with that said,
determining the likely direction of the trend and where turns are likely to
occur plays a very important part of the complete trading plan. It is with
Cycles a trader can anticipate the new trend or end of a correction better
than anything else.
So why aren't Cycles used commonly among traders? There are several reasons,
none of which reflect negatively on Cycles themselves as a trading tool. Some
fail to realize that market behavior is not a random event but instead one
based on Cycles (Natural Laws). Others do not wish to take the time to fully
understand what Cycles are and how they can benefit from them. And of course
some simply are not aware of them to begin with.
For the latter reason, hopefully this multi-part series on Cycles will be an
eye-opener. Because no one can change the course of market cycles, it does not
matter how many are aware of Cycles or decide to use them. Perhaps it is also
Natural Law we will continue to have a skeptic majority when it comes to
successful analytical approaches to market timing to insure we will
continue to be able to use Cycles in effectively timing trades. Does it matter?
Before we get deeper into the subject of Cycles in the following parts of this series, it should be noted Cycle Analysis is only a tool for timing. It is not a complete trading system or the only tool you may wish to use when
planning trades. However, when it comes to timing, it is perhaps the best timing tool you can have in your trading arsenal.
This completes Part One.
CYCLES – Part Two
When it comes to the subject of Cycles, one thing is for certain …
everyone has a different mental picture of what it means.
Many traders associate the subject of Cycles with individuals such as Walter
Bressert. This is an excerpt from an article he authored called “Trading
and Control”:
“For commodity and futures traders, the technique of using cycles as a
trading strategy will undoubtedly bring to mind trader and analyst Walter
Bressert. Bressert, who has been in the trading industry for nearly 30 years,
was the publisher and editor of the well-regarded newsletter HAL Commodity
Cycles for 12-years.”
How these well-known individuals have presented Cycles over the years has
been in their raw state. What I mean is that Cycles for years has been taught
to be the locating and following of a fixed interval on the price chart. For
example, one might count the number of price bars from one market top to
another and note that there are 30 bars. Then another 30 bars would be counted
to see if yet another top or bottom has occurred. If so, the trader would then
assume a 30-bar (day/week/month) cycle is in play and will be in expectation of
another turn when the next 30th bar was formed.
With a strong 30-bar cycle in evidence, you just might get another turn 30
bars later. But what many have found is that as soon as you identify the cycle
length it would no longer manifest itself. This has led many to disregard
cycles for use in market timing.
It is a fact that Cycles are indeed repetitive patterns. So in no way would
I suggest that these fixed-length intervals of tops or bottoms are not true
Cycles. However, the reason many are unable to capitalize on using Cycles in
trading is that they have not come to learn what actually makes up the patterns
they see on their price charts. It does not take long to note that those
patterns are not fixed intervals of tops and bottoms for the whole world to
clearly see and trade on. Instead, what we see are prices making big tops and
little tops, big bottoms and little bottoms, and they are all spaced at
different intervals that has led some to believe it is all random. However,
nothing could be further from the truth!
What I have discovered in sharing my knowledge and experience in this field
of Cycles is that those with backgrounds in Electrical Engineering, Analog
Electronics and those that excel in logic or the visual arts are quicker to
understand what makes up the charting patterns we see on our price charts when
it is explained to them. This does not mean others cannot of course. Those
especially in the Electronics field are well aware of what Cycles are and are
likely to also know what you get when you combine two or more cycles together
of different magnitude and wave-length. And that is what brings us to the next
part of this series on Cycles.
What makes up the cycle patterns we see on our price charts? We will cover
this in Part Three.
CYCLES – Part Three
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.
CYCLES – Part Four
The subject of Cycles falls into two camps. You have those that base their
theories on the Random Walk (or the “drunkard’s walk”). One
approach to de-trending involves the use of Fourier Transforms. Here is a
excerpt about the use of Fourier Transforms found at the website below the
quote:
“The Fourier transform, in essence, decomposes or separates a waveform
or function into sinusoids of different frequency which sum to the original
waveform. It identifies or distinguishes the different frequency sinusoids and
their respective amplitudes.”
Click-Here
for more info
John Ehlers devised an approach to Cycle Analysis he dubs MESA. Claimed to
be more effective for isolating short-term cycles over the Fourier Transform.
Both these approaches are based on the assumption that the cycles found in
market patterns are formed by random actions, a theory I have long discovered
is not correct. However, regardless of the base theory to how cycles have come
to exist within market patterns, fact remains they do exist. And so these
varied approaches to exposing these cycles have proven to be useful to a
degree.
Why I am able to say with conviction that market cycles are not the result
of random behavior is based on my own experimentation in the field of cycles. I
became interested in cycles after having read about them in W. D. Gann’s
books. These books did not provide me with anything I could use as far as
cycles analysis goes, except that it started me looking in the right direction.
Having already discovered a geometric approach to timing market tops and
bottoms that was incorporated into a software program; this was used for
comparison purposes when I started to incorporate my theories about cycles into
its own computer program. Today I use both programs to confirm their respective
results. It is absolutely amazing to see the relationship between market cycles
and market geometry. They are most definitely related!
My approach to cycle analysis is unique in comparison to those widely known
and advertised. Rather than trying to de-trend historical market patterns into
their individual components and then re-combined them for forecasting purposes,
my approach is based on locating anchor points in time within the pattern
itself and then moving it forward in time (and in sync with the recent past)
for the purpose of forecasting.
For instance, at some point in time market patterns will REPEAT themselves.
In its basic form, this is what many ‘technicians’ use to trade the
markets. For example, you may have heard of the ‘M’ pattern or the
‘heads-and-shoulders’ pattern. You've no doubt heard of the
‘triangle’, ‘flag’ and others. Technicians have long
discovered that the market will follow a certain behavior more times than not
after these common patterns.
But imagine if you can locate COMPLETE patterns that span beyond a simple
‘flag’ or ‘heads-and-shoulder’, etc. Then imagine if you
could find this repetitive pattern in more than one time period in the past.
What you will discover as I have is that the time distance between the patterns
are EQUAL in length. So then, once the pattern has been found, you KNOW where
to plot it into the future; the exact distance from the end of the last one you
found.
It takes a very sophisticated program to do all this comparing, but that is
exactly what I had my program do. And the results continue to amaze me.
The point here is that what you see on your price charts is but a small
sample of a much larger picture (going all the way back to when the market
started trading). So it is easy to not be able to see the repeating pattern
threads.
To help you further understand the depth of this cycle analysis and what
will make it hard to easily see the patterns is due to the MAGNITUDE of some of
the component cycles.
For example, consider the two cycle threads below (these are dynamic cycles
as they the result of several fixed-interval cycles combined). The spacing
between the numbers depicts the varied distances between the cycle turns (tops
and bottoms). Note these distances vary because we are dealing with patterns as
seen on your chart that are dynamic cycles and not just a single fixed cycle.
The numbers we will call the MAGNITUDE of the turn. The positive numbers are
tops, the negative numbers are bottoms. The magnitude will range from 1 to 10
for tops, -1 to –10 for bottoms. Obviously then, the higher the number
positive the higher the top, and the lower the number negative the lower the
bottom.
---3-------(-6)---4--------------(-9)-------5---(-3)--------8----(-4)----------10---(-2)------6----
---5-------(-3)----7-------------(-4)-------7----(-6)------5-----(-7)------------7---(-3)-----4----
The above are TWO EXACT cycle threads based purely on PATTERN. Yet, the
magnitude of these two threads is different. So if you rely on your
‘eyes’ to spot the patterns, you will not likely be able to do so
even if you had ALL the data stretching back years before you on the wall.
Thus, it takes a computer to help here.
Now if we had data covering centuries it may be possible to find the start
of the exact pattern, magnitude and all, that has occurred since. Well, there
just isn't enough data to do this. Anyway, it isn't important for our purposes.
We simply want to determine when a turn is most likely. We don't need to have
the sight of God.
A set of books I highly recommend that deals with Cycles and Market
Geometry:
Click-Here for list of
books
This concludes Part Four.
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