Applying Cycles to Charts

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:

Cyclic characteristics

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:

The Cycle icon on the charting 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.

Inputting the cycle length

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.

Eyeballing the cycle lows

By then adding the smaller cycles we will end up with a clearer picture:

Completing the group of cycles

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.

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