Nothing Beats Cycle Analysis for Market Timing

To make profits trading in futures & Commodities, Forex & the Stock markets, we can all agree that you must buy low & sell at a higher price, or sell high & buy back at a lower price. Usually, this is easier said than done.

The majority of active traders today (as opposed to investors) rely on technical analysis as opposed to fundamental analysis for making trading decisions. The reason for this is that market timing is more critical today than ever before. If you enter the market too early, you must be able to withstand the pain and uncertainty that comes with seeing the market moving against your position and watching your account balance dwindle before your eyes. On the flipside, if you enter too late, you may see the market initially move in your direction, but come to an abrupt end and turn against you because most of the move has already taken place initially without you. Worse yet, because it initially was moving in your favor, you may be more inclined to stay in a losing trade thinking it is just a temporary setback.

There does not exist a perfect technical indicator. Each indicator has its pros and cons. Most indicators, if perhaps all of them, are not based on the true nature of market behavior. What would that be? The Law of Nature, or also known as “Natural Laws”.

We are all familiar with some laws of nature. For example, we all know that “what goes up must come down” due to gravity. In some way, that also applies to the markets based on ‘supply and demand’. However, as inflation will always be built into the goods we buy and sell, the up and down movement of the markets are not the same as that of gravity. No, the idea of natural laws affecting the markets is more in line with such natural phenomena as the seasons (for planting, growing and harvesting), which is tied to weather, which both are cyclic events. You have night and day, rain and shine, an other natural reoccurring cycles. No wonder that those indicators that fall in the “oscillator” classification tend to provide some good feedback for technical analyst. It just stands to reason that these type of indicators are based on information that is more in line with the natural influences of market behavior than indicators that do not take cycles into account.

There is a wealth of information to be gained from an oscillator like the Stochastic or MACD, for example. These tend to cycle up and down in a rhythm closely matching that of the market analyzed. By following this cyclic pattern, you can get a ‘feel’ for the direction the market is going at any given time. This practice is a form of analysis that is taking advantage of the underlying dominate cycle of the market.

Anticipation is part of the market timing task. As you watch the market moving down along with the oscillator cycle pattern, you start looking for when that oscillator moves into some expected oversold (over-extended) range and start to flatten out or turn up. The expectation is then that the market is making bottom and it may be time to buy. Sometimes this works, sometimes it does not and price keeps dropping and the oscillator stays pegged in oversold territory. Perhaps you have experienced this for yourself from time to time.

Clearly, using just any oscillator, or just one can be a hazardous approach. But using an oscillator indicator that has proven reliable most times is a step in the right direction. In my own market analysis, I often like to use the Stochastic and MACD indicators along with my cycle turn dates.

What are cycle turn dates?

Let’s use the oscillator indicator as a reference for answering this question. Suppose that you notice the cycle pattern of your oscillator tends to top every 20 days. It would then seem logical to conclude that 20 days following the last time it topped that it will either likely top again be near doing so, if it had not done so by that time already.

With that information, you might then note the date of the market actually topped when the oscillator did and add 20 trading days to that date to get an idea of when another top may occur. Therefore, you could call that future anticipated date a cycle turn date, because you are expecting the market to possibly turn when that date arrives.

While this would be a valuable exercise in analysis, it is not the most efficient or accurate way to calculate cycle turn dates. In fact, there exist better methods for doing this. In my Market Forecasting Secrets book, for example, there are methods that deal with the current pattern found in the market for determining future turn dates, and there are more esoteric approaches that have nothing to do with patterns at all! Yet, a method alone or in conjunction with another often produce market timing results that just blow the doors off any indicator that you can find.

The reason for this is that the methods that work the best for market timing are those that dig deep into the actual reasons why markets make tops and bottoms in the first place. When you consider what influences the markets as already discussed (i.e. seasons, etc.), you should consider what influences those forces to begin with. There lies the answer to many questions in market timing.

The key to market timing all comes down to market cycles. If you focus your study on cycles and less on trying to find some indicator that promises to make you rich, you can start to pinpoint the best times to buy or sell and the best times to do nothing at all.

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