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Cycles in Technical Analysis

Cycles are recurring interval of time, within which various regularly repetitive events are completed.

Most phases of technical analysis depend to some extent on time considerations. Cyclic analysis holds that time cycles are the determining factor in bull and bear markets. Not only is time the dominant factor, but all other technical tools can be improved by incorporating cycles. Moving averages and oscillators can be optimized by tying them to dominant cycles. Trendline analysis can be more precise with cyclic analysis by determining which are valid trendlines and which are not. Price pattern analysis can be enhanced if combined with cyclical peaks and troughs.


Cycle bottoms are called troughs and the tops referred to as crests, cycle lengths are preferably measured from low to low.


The three qualities of a cycle are amplitude, period, and phase. Amplitude measures the height of the wave. The period of a wave is the time between troughs. And the phase is a measure of the time location of wave trough. Because there are several different cycles occurring at the same time, phasing allows the cyclic analyst to study the relationships between the different cycle lengths.Phasing is also used to identify the date of the last cycle low. Once the amplitude, period, and phase of a cycle are known, the cycle can theoretically be extrapolated into the future. Assuming the cycle remains fairly constant, it can then be used to estimate future peaks and troughs. That is the basis of the cyclic approach in its simplest form.


 Cyclic Principles

There are six most important principles of cycles: Summation, Harmonicity, Synchronicity, Proportionality, Variation and Nominality.

The principle of summation holds that all price movement is the simple addition of all active cycles. Cycle theory holds that all price patterns are formed by the interaction of two or more different cycles. The principle of summation gives us an important insight into the rationale of cyclic forecasting.

The principle of Harmonicity simply means that neighboring waves are usually related by a small, whole number. That number is usually two.

The principle of synchronicity refers to the strong tendency for waves of differing lengths to bottom at about the same time. It is also means that similar cycle lengths of different markets will tend to turn together.

The principle of proportionality describes the relationship between cycle period and amplitude. Cycles with longer periods (lengths) should have proportionally wider amplitudes.

The principle of variation is a recognition of the fact that all of the other cyclic principles already mentioned - summation, harmonicity, synchronicity, and proportionality - are just strong tendencies and not hare and fast rules; some “variation” can and usually does occur in the real world.

The principle of Nominality is based on the premise that, despite the differences that exist in the various markets and allowing for some variation in the implementing of cyclic principles, there seems to be a nominal set of harmonically related cycles that affect all markets. An that nominal model of cycle lengths can be used as a starting point in the analysis of any market.



Dominant Cycles

There are many different cycles affecting the financial markets. The only ones of real value for forecasting purposes are the dominant cycles. Dominant cycles are those that consistently affect prices and that can be clearly identified. All technical analysis should begin with the long term picture, gradually working toward the shorter term. That principles holds true in the study of cycles. The proper procedure is to begin the analysis with a study of long term dominant cycles, which can span several years; then work toward the intermediate, which can be several weeks to several months; finally, the very short term cycles, from several hours to several days, can be used for timing of entry and exit points and to help confirm the turning points of the longer cycles. As a general rule, long term and seasonal cycles determine the major trend of a market. For trading purposes, the weekly primary cycle is the most useful.The trend of each cycle is determined by the direction of its next longer cycle. Once the trend of a longer cycle is established, the trend of the next shorter cycle is known.


LEFT AND RIGHT TRANSLATION

The concept of translation may very well be the most useful aspect of cycle analysis. Left and right translation refers to the shifting of the cycle peaks either to the left or the rights of ideal cycle midpoint. For example, a 20 day trading cycle is measured from low to low. The ideal peak should occur 10 days into the cycle or at the halfway point. That would allow for a 10 day advance followed by a 10 day declines. Ideal cycle peaks, however, rarely occur. Most variations in cycles occur at the peaks or crests and not at the troughs. That's why cycle troughs are considered more reliable and used to measure cycle lengths. Cycle crests act differently depending on the trend of the next longer cycle. If the trend is up, the cycle crest shifts to the right of the ideal midpoint, causing right translation. If the longer trend is down, the cycle crest shifts to the left of the mid point, causing left translation. Therefore right translation is bullish and left translation is bearish. In bull trend prices spend more time going up rather than down. In bear trend prices spend more time going down that up.