UNDERSTANDING MARKET CYCLES

Transcription

1 UNDERSTANDING MARKET CYCLES

2 Cycles Searching the term market cycles on Google brings up nearly 5 million results. Above are some of the many images that you will find dealing with the subject of market cycles. Many clearly acknowledge that market behavior is tied to underlying cycles, and if you can determine the cycle currently affecting a market, you can anticipate what it will likely do in the very near future.

3 The prices of stocks, futures and commodities, Forex and other freely traded markets move as a result of a combination of cyclical forces. There are various theories put forth as to where these cycles come from. Some use Agriculture as an example, pointing out that there is a time to plant, to grow, and then to harvest. We know that this repeating pattern is based on the seasons, and we know that the seasons repeat over and over again based on the relationship of the Sun and Earth. It is also pointed out that we follow a pattern of behavior also based on the Earth and Sun relationship. For example, most sleep (inactivity) when the Sun goes down and then become active again when the Sun rises. This repeating pattern (cycle) is based on the 24 hour rotation of the Earth in reference to the Sun. Some also point out other repeating phenomenon that affects life on Earth. For example, the Moon causes the ocean levels to rise and fall due to the change in gravitational pull. In fact, this change is felt in other bodies of water as well, and humans are estimated to be 61.8 percent water by weight. The brain is composed of 70% water. Therefore, it should be of no surprise that the Moon has an affect on people. The Latin word for Moon ( Luna ) is the root of the word Lunatic. Apparently a connection was made long ago between the Moon and our psyche. And it is people who are making buy and sell decisions in the markets.

4 Whatever the reason is that cycles exist, we as traders do not need to be bogged down by all the details. All we need to understand is that they exist. And to those who can determine what the current dominate cycle is of a market, and where that cycle currently is along its repeating path, goes the spoil. In other words, we do not need to know why cycles exist, only that they do and to anticipate what the result of those cycles are likely to do in the near future. Above is an example of a simple Sine Wave cycle. Assume that only one cycle, the one above, is all that affects the market you are analyzing. The market moves in the direction of this cycle. If right now in TIME we are at the red X, can you anticipate what the market will do next? Do you think you can profit from knowing this?

5 Of course we know that trading market cycles is not as easy as following a single cycle. The reason is that every market is affected by the culmination of many cycles. They are harmonically related to each other and span out in both directions (shorter and longer frequencies). Shorter duration Longer duration According to Hurst theory, as a frequency doubles so does its amplitude. The example above does not show the change in amplitude, as I simply want to point out that there are many cycles at work affecting all the markets. You can have a cycle repeat every few seconds, hours, days, weeks, months, years, on and on.

6 Now you may be wondering how in the world can anyone anticipate what the market will do next if it is affected by numerous market cycles of different amplitudes and frequencies? The answer to that question comes down to the TIME FRAME that you want to focus on. For example, if we are looking at a DAILY chart of Soybeans, we are naturally interested in the DAILY TIME FRAME. Based on Hurst theory that as the duration of the cycle decreases, so does the amplitude. So if we are looking at a DAILY chart, cycles that repeat every few seconds are not going to have much of an affect (manifestation) on a chart showing DAILY prices because the amplitude of such cycles are too small to really notice. However, a 4 hour cycle is going to have some minor manifestation on a DAILY price chart, and a cycle that repeats every 3 days is certainly going to show often on a DAILY chart, as is a 21 day cycle (3 weeks) cycle. Going further out, such as a 10 year cycle, will certainly have an affect on the long term trend of the DAILY chart, but you will see it much better on a longer term chart, say a WEEKLY or MONTHLY chart. So the bottom line is that for whatever TIME FRAME we are focusing on, it is the cycles closest to the current time frame that will have the greatest manifestation and use for our timing purposes.

7 So how do multiple cycles form the patterns we see on the price chart? What we see on the price chart is the CUMULATIVE EFFECT of these cycles at any given time. We will use these 3 cycles shown above to demonstrate, although it has already been discussed that many more cycles are also at work. This will give you a good idea of the concept, however.

8 It s not pretty, but hopefully it gets the concept across. Add more cycles and the pattern becomes more like what you see on price charts.

9 On the previous example, you simply add up the values where the vertical red time line crosses the cycles. The top cycle has an amplitude of 20 (10 to 10), the middle cycle 10 (5 to 5), and the bottom cycle 5 (2.5 to 2.5). When the cycles are all positive, you get the big moves up. When you have some positive and other cycles negative, there is some cancelling out. When all are negative, you have a big move down. Using those red vertical lines as our time reference as DAYS, with the first line as DAY1, note that the longer term cycle (top) is on its way down and is currently at the 0 value mark. The mid term cycle (middle) is at its bottom 5 and will be moving up, and the short term cycle (bottom) is at its top 2.5 and going to start moving lower. So if you add those up, the total for DAY1 is 2.5, a mildly negative day. This goes on until DAY3 to DAY4, where all 3 cycles are moving up and topping at DAY4 at From there, it goes bearish again. Feel free to add more cycles to this plot, doubling the amplitude for each new longerterm cycle you add (next would be 20 to 20, then 40 to 40, etc.) and cutting in half the amplitude for each new short term cycle (next would be 1.25 to 1.25, then.75 to.75, etc.). Place vertical time lines and then add up the positive and negative values where those lines cut through the cycles. Notice I skewed my lines following DAY8 and the pattern changed. Since these lines represent TIME, you can call it DAYS, WEEKS or some other time frame.

10 This is a daily chart of Soybeans with the MACD and Stochastic indicators plotted. I find these indicators quite useful because they do a pretty good job of exposing a good portion of the underlying cyclic effect. Notice that the MACD is showing a much longer cycle wave and the Stochastic is showing the result of several short and mid term cycles combined. Can you follow the cyclic flow of this market by matching it up to the MACD? How about using the Stochastic?

11 This is the weekly chart of Soybeans. Notice that by using the MACD, you can get an approximation of the dominant cycle at work. Notice that it is suggesting that soon a weekly cycle bottom should complete and that weekly prices should then rise again.

12 This is a monthly chart of Soybeans. Notice that it has been forming the long term cycle top and soon should be heading towards making the cycle bottom. This is an estimation, of course, but can you see the value of all this information? We get the LONG TERM, MID TERM and SHORT TERM likely directions from these 3 time frames! And don t forget, they can ADD to each other, or CANCEL OUT each other at varying degrees depending on where each is within its own cycle time frame at any given time.

13 What I have just demonstrated using the Soybeans chart is something that anyone can do using the simple MACD and Stochastic indicators. But as you have seen on the previous charts, especially the DAILY chart, is that the price will swing from top to bottom and back again, usually a few times, between the tops and bottoms of the cycle that was drawn using MACD. These swing tops and bottoms are what DAILY FDATES are used to locate. FDates (for Future Dates) are calculated using Geometric Mathematics as well as Dynamic Cycle Analysis for the time frame of the data used. If daily historical data is used, the resulting FDates are very short term and used on a DAILY chart. FDates are also calculated from weekly historical data, generating what we call midterm turn dates. These calculated turns are based on a time frame that is greater than that of the daily short term. Another name for weekly FDates is simply WDates (for Weekly future dates). Put in perspective, think of the daily FDates as based on the shorter term cycles and the weekly FDates based on cycles of greater duration. By using them both together, you can start by getting first the BIG picture for direction, then look to the daily to TIME your entry and exit. From what has been demonstrated, you can see that the advantage is when you get both time frames moving in the same direction!

14 Hopefully you have learned enough about the cycles to understand the logic of following the Guidelines provided within the FDates Membership forum. The KEY to successful trading comes at not only knowing what the trend is now, but what it is likely to be next week and beyond. Also, you should be able to see how important it is to have the cycles working for you, not against you. If the mid term cycle is moving from TOP to BOTTOM, do you really want to be buying off the short term cycle that is moving from BOTTOM to TOP? Remember, at this point they would be CANCELLING out each other to some degree. This information should also help you understand why you should not simply buy or sell every time there is a FDate due. Just because the Fdate suggests that a top may be due on the daily chart (short term) does not mean we should run off and immediately sell the market. This would only be valid if the mid term cycle was either topped out and ready to turn down, or is already in the downward part of the cycle. By having a good idea in your mind as to the cycle direction of the different time frames (especially the weekly and daily if you trade off the daily), you can then make better choices as to which FDates to trade and which you should ignore.

15 QUESTIONS? The FDates Market Timing Membership is not only where you get your daily and weekly FDates each week on the FDate Report, but it is where you can all the ongoing training you can ever ask for! Consider it like having your own mentor available at all times to field your questions. So if you do not understand something, or you simply want to discuss a particular market for a possible trade opportunity, then post your question on the FDate Forum. Every question is addressed.