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Market Cycle |
Wednesday, 31 December 2008 12:26 GMT
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In a recent article I described the influences cycles have on price and
how it is possible to identify approximate time areas where the
underlying price trend will reverse. Through observing when these
reversals are likely to occur in the future it is possible to forecast
several months ahead of one of these turning points when they will
occur and thus understand the underlying direction for the intervening
period.
What we now need to do is understand how these can be applied to the
chart.
It is a manual process and not one which you can program to do
automatically, but with a degree of trial an error it is normally
possible to organize a logical framework of cycles. For this it is
important to remember one of the basic principles of cycles –
that of synchronicity – which dictates that cycle lows will
normally occur at the same time and that two smaller cycles will fit
into one larger cycle. This can be seen in the image below:
With the cyclic drawing tool that is available in Dealbook 360 charts
it is possible to add these cycles onto charts. The cycle icon can be
found in the chart toolbar:
By opening a chart and clicking on the cycle icon it is then a simple
matter of clicking on the bottom of the chart to apply the basic cycle:
Once applied the default cycle length of 10 is applied to the chart and
almost certainly this will not be the most appropriate length for the
chart. By double clicking on the cycles a cycle format window appears
and allows you to change the color and cycle length. After clicking on
“OK” the new cycle length will appear on the chart.
Now the initial process of applying cycles is a matter of trial and
error. The first things to do is “eyeball” the
chart to try and identify the larger price lows and the intermediate
price lows in between to check they are roughly centrally located
between the larger cycle lows.
For example, on the weekly USDJPY we could begin by applying the red
cycles and then checking the cycle lows between by reducing the cyclic
length by half and sliding the cycles along by the
“handle” at the very bottom of the cyclic arcs.
By then adding the smaller cycles we will end up with a clearer picture:
After applying the weekly cycles you can then use the price lows to
identify the cycle lows for the daily chart and then halve the length
to generate smaller cycles. You should find that in general the price
lows will still match cycle lows although accuracy in the daily chart
tends to be less than weekly.
This form of analysis will provide you with much greater insight into
price direction and timing of key reversals.
Written by: gftforex.com
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