Cycles – Part One - By Profit Max Trading

“There are cycles in everything. There are cycles in 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

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.

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.”

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.

This concludes Part Four.

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