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Cycles

Cyclical methods are based on the fact that price history repeats. There is a significant body of academic theory and research to support the existence of economic cycles and market cycles. The Foundation for the Study of Cycles has documented a consider able body of evidence to support the cyclical approach to trading. In addition, Jay W. Forrester at MIT has developed a highly intricate and statistically valid method of evaluating long-term economic cycles.

The Good News. Cycle trends and cyclical patterns are relatively easy to find and can be subjected to major mathematical testing and evaluation. Price cycles exist in virtually every market and in many different time frames.

The Bad News. Cycles are not always accurate. At times, cycle lows and highs are skipped; other times, cycles can bottom late or early or top late or early. Hence, timing is an issue of major importance. There is also some doubt as to whether cycles even occur on a very short-term basis. Dyed-in-the-wool proponents of cycles would argue that cycles exist in all time frames, although there is still insufficient statistical evidence to support this contention.

This does not mean, however, that cycles are totally useless for day trading. It is possible to extract eye lical tendencies that, when used with timing, can prove effective in day trading. See Figures 2-8 and 2-9 for examples of intraday cycles.

Solutions. Use timing indicators with cycles. Do not make the mistake of thinking that cycle lengths are written in stone. Remember that cycles can be skewed. Tops can come very late or very early, as can bottoms.