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MTA Educational Web SeriesUsing Cycles in trading
By: Matthew Caruso, CMT
Matthew Caruso, CMT
Matthew Caruso is a Senior Pro-Equity trader at National Bank Financial (NBF) as well as an active independent futures trader. Matthew is a Chartered Market Technician and serves as President as well Montreal Regional Director for the Canadian Society of Technical Analysts (CSTA). Matthew is also an adjunct professor at Concordia University’s John Molson School of Business where he teaches the course “How to build a profitable trading system (using technical analysis)”.
Matthew has written several articles which have appeared in stocks & Commodities magazine as well as the MTA newsletter
What are cycles?
Cycles are recurring patterns in time Many real world phenomena move in
predictable cycles In the market, a cycle is an approximate
length between important market bottoms No definite explanation as to cause
How can cycles help your trading?
Selection of TA tools – what technique should I use? What length should I study?
Prevents over trading Determines time frame for decision
making
Cycle Characteristics Retracement (Chart 1)
Cycles typically retrace by one to two thirds after their peak (uptrend) or bottom (downtrend)
Translation (Chart 1) In an uptrend (larger cycle is up), cycle tops are made
in the second half of the cycle In a downtrend (larger cycle is down), cycle tops are
made in the first half of the cycle
Fractals (Charts 2 & 5) Cycles work the same on all time frames Larger cycles impact smaller cycles
Chart 1
Chart 2 – Daily Cycle
Chart 3 - Downtrend
Chart 4 - Uptrend
Chart 5 – Larger Fractal
Cycles Pros Risk vs. reward (chart 6 & 7) Prevents over trading
Prevent excessive pyramiding at wrong time Forces you to wait for the market and anticipate
Provides a rationale for selection of indicators as well as lengths of indicators
Provides a continual understanding and awareness of trend (right & left translation a result of larger cycles. Larger Cycle = trend)
Knowledge of the direction of the larger cycle is gives insight of the current trading trend – chart 5
Chart 6 – Risk vs. reward
Chart 7 – Risk vs. reward
Cycles Pros Risk vs. reward (chart 6 & 7) Prevents over trading
Prevent excessive pyramiding at wrong time Forces you to wait for the market and anticipate
Provides a continual understanding and awareness of trend (right & left translation a result of larger cycles. Larger Cycle = trend)
Knowledge of the direction of the larger cycle gives insight of the current trading trend (chart 5)
Provides a rationale for selection of indicators as well as lengths of indicators (Slide 15)
How cycles determine your TA tools Oscillators used with cycles should be ½
or ¼ the length of the cycles being traded (Charts 8 & 9)
Oscillators should be used only to enter a market, not to exit
All oscillators give very similar results, use what you are most comfortable with. I prefer the stochastic or %r
Chart 8 – Tools selection
Chart 9 – Tools selection
Cycles Cons Not perfectly consistent Very difficult to automate Very difficult to mechanically back test Sometimes downright confusing Difficult to apply on short timeframes
Recommended Reading CMT Program “The power of Oscillator/Cycle Combinations” by
Walter Bressert*** “The mysterious forces that trigger events” by
Edward Dewey “The profit magic of stock market transaction
timing” by J.M. Hurst All books by Larry Williams (not cycle related)