Stock Cycles
|The markets and individual securities routinely fall into cycles that are measurable and predictable. Socioeconomic and market conditions may themselves change but the cycles still tend to prevail, especially for the duration of the trend. Traders who can identify both the cycle and the current location of price in that cycle are more likely to be successful in timing their entries and exits.
In traditional technical analysis there are a lot of long term established cycles that influence the broad markets. However, as traders, we want to focus on the shorter time frame cycles that will influence our securities while we are in positions.
A cycle is measured by the distance between lows. This is also referred to as the frequency of the cycle. In trader terms, the frequency will tell you when to expect lows or moves to the downside in price. Once you identify the stock’s cycle, you have a higher probability for trading in the right direction.
As I previously mentioned, cycles are measured from the lows. There is a cycle tool on some trading platforms that will allow you to line up vertical lines with the lows on your price chart. Don’t worry if the lines do not match every low, as there are multiple cycles affecting the price at any time. You want to locate the dominant one that you can trade with. That will be the one that contains the majority of the lows.
We can do this study on any stock and for any timeframe.
The cycles will be more stable on longer term charts, but knowing the cycle can assist you in your trading. If you see price approaching a supply or demand level but the cycle is not indicating a top or bottom, the level may have a higher probability of breaking. But if the cycle top or bottom is near, the levels are more likely to hold.
Online Trading Academy’s Core Strategy partly relies on using multiple time frames for proper analysis. When we look at the higher timeframes, the cycle lends itself to assist the trader in deciding which direction they should trade in. When the trader then drops down to a lower timeframe to identify entries and exits, the cycle can be used as an odds enhancer for seeing whether the demand and supply zones are more or less likely to hold.
If the trading platform you use does not have the cycle tool, you can still easily locate the cycle of your security. Start by marking the lows and then count the number of candles in between those lows. They should be relatively similar. You can then take the average between those lows as your stock’s or market’s cycle.
So while it is not a perfect indicator, (there is no perfect indicator, decisions should be made from price) the cycle of a security can be a good odds enhancer when you are trading. To greatly improve your chances for success in trading the markets, visit your local Online Trading Academy Center today and enroll in a course.
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