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Greetings, friends Forex traders.
Most of the tools of technical analysis looks at price as the main starting point. But any trading instrument, there is another characteristic. This time.
of Course, any tool of technical analysis takes into account the time also, but the value is just sort of implied. Today we look at the time, as the main analysis tool. You will have a philosophical theme of time and its application in trade.
the Analysis of cycles
We are going to talk about the so-called cycles. The experts involved in this analysis, I believe that only the cyclicality as a feature of market development is an explanation of the UPS and downs of prices. We'll extend the list of the most important technical analysis tools market a temporary setting and will be able to answer not only the question, in what direction and how far the market will develop, but when he will come back and when will this movement.
Let's look at a typical daily chart of the EURUSD. On the vertical axis are the scale of prices. This indicator gives us only half the necessary picture. The horizontal axis time scale. Thus, a schedule is actually a schedule, not only prices, but also time. However, many traders analyze price data exclusively, completely ignoring the time factor.
When we study a graphical model, we understand that there is a relationship between the time in which is formed one or the other configuration, and the potential for further market movement. The longer the "stick" trend line or support or resistance, the more meaningful they become. The time factor is also very important when using a moving average as an analytical tool, which is very important to choose the appropriate time period. Even working with the oscillators, it is necessary to decide on the number of days constituting the period of calculation.
it Becomes clear that any method of technical analysis in one way or another depends on the time factor. At the same time, the use of time indicators is not always consistent. To increase the efficiency of technical analysis, taking into account the time factor and apply cyclic analysis.
the Work of any technical indicator can be significantly improved if the structure include cyclic analysis. For example, by binding of moving averages and oscillators to the dominant market cycles to optimize their work. The loop analysis also allows to improve the accuracy of analysis of the trend lines, indicating which lines are significant and which are not. In combination with peaks and troughs of the cycles can significantly increase the possibility of analyzing price patterns. Using "time Windows" you can filter the price movement so that unnecessary signals will be discarded, and priority will be paid only to the moment of the most important tops and bottoms of cycles.
the Prediction of the future and cycles
Can you predict the future? I can. For example, tomorrow my train will leave at exactly 10:00. The sunset tomorrow will be exactly at 19:51, and sunrise at 5:11. Want to bet that this is not my predictions come true? I think not. What I do predict the future or is it not?
first, we do actually predict the future every day. At least in the field of natural or astronomical phenomena.
secondly, much of the accuracy of our predictions is due to the fact that there are distinct repeating cycles.
However, the presence in our life cycles have become so familiar that we do not attach them based on the predictions of special significance. We just projected cycles in the future, assuming that they will happen again.
how are you with the idea that all human life is a recurring cycle of events? Got up, went to work, worked. Come have fun in the chat for traders, went to bed. And so day after day. What if there are some cycles and in business? Then there must exist in the securities markets. And a whole country can be economic cycles? Can.
Quite a lot of literature is devoted to the cycles of our life. For example, the abundance of Atlantic salmon comes around once every 9.6 years. Every 22.2 years in the world happens to be a military conflict. Sunspots appear with the amplitude of 11.11 years. Real estate market cycles are 18,33. On the securities market – 9.2 years.
In the picture above the solar cycles. A blue circle marked local crises. Red – the global. Yellow – oil. Here is a link to this chart in tradingview. Judge for yourself.
the Following figure generally will bring you a lot of reflection:
As you can see, the cycles do exist, it is an indisputable fact. It remains only to understand how to use them.
the Basic concepts of cyclic analysis
In 1970, George. Hurst published a book "the secret art of the timely transactions in the stock markets." Still, most of the book is devoted to the cycles that determines the functioning of the stock markets, it represents the most comprehensive and accessible presentation of the theory of cycles. Three years after the book publishing house "Silitek services" has released a training course on the analysis of cycles, based on the book by Hirst. Unlike books Hirst — this course covers the analysis of cyclicity in some other areas, particularly in the markets of commodity futures.
the example above shows two repeats of the price cycle. The low point of the cycle development is called the base (trough), the top — the top (crest). Please note that two waves shown below, measure from the base to the ground. Just in cyclic analysis, it is customary to measure the length of the cycles between the lower points. You can measure the distance between the vertices, but the parameters obtained in this way are considered to be unstable and therefore not so reliable. Thus, the most common method of determining the start and end of the cycle is the measurement of cyclic waves, produced in its low points.
the Main characteristics of the cycle, amplitude, period and phase. Amplitude measures the height and is expressed in dollars, cents or points. The wave period measures the time passing between the lower points.
In the example below, the period is twenty days. Phase is called the temporal position of the base of the wave.
the example below shows the difference in phase between the two waves is:
So, as always, at the same time develop multiple cycles at the same time, the phase analysis allows to identify the relationship between cycles of different lengths, and to determine the time of passing the loop through the bottom point. If, for example, we know when the twenty-day cycle has passed through the bottom point (say, ten days ago), we can easily identify when it happens again. Once determined the amplitude, period and phase of the cycle, it is theoretically possible to extrapolate a cycle in the future. If we can assume that characteristics of the loop remains more or less unchanged, it is possible to determine the future of the lower and upper point of its development. This is the basis of cyclic analysis in its simplest form.
the Principles of cyclic analysis
Let's look at some principles that underlie the theory of cyclicity. The most significant are the principles of summation, harmonicity, synchronicity, and proportionality.
the Principle of summation is that all price movements are a simple addition of all active cycles. Example the figure below shows that the pricing model is on top of the market is formed by simple addition of two different cycles at the bottom:
Pay special attention to the fact that in the composite wave appears a double top. According to the theory of the cycle, all price patterns are formed by the interaction of two or more different cycles. Thus, the summation of helps to understand the logic of forecasting of the market by using cyclic analysis. Assume that any price movement is the sum of cycles of different lengths. Assume further that each of these cycles can be isolated and measured. And finally, let's say that each of them will continue in the future. Then you can simply continue all the cycles and projecting them into the future, and again to fold them, thus obtaining the future tendency of development of the market. Anyway — about this opportunity says the theory of cyclical behavior.
the Principle of harmony implies that the ratio of the waves is determined by a small integer, typically "2". For example, the following smaller loop adjacent a twenty, will be ten that is less twice. The next increase will be forty days, that is the greater of two times.
The principle of synchronicity is intended to explain the strong tendency of different wavelengths to reach the base almost simultaneously. An example demonstrates the two principles of harmony and synchronicity:
Wave In, which is located in the bottom of the graph, twice shorter than wave A. Wave A consists of two repeats of a smaller wave In demonstrating the harmonious relationship between the two waves. Please note that when the wave reaches the bottom of wave is also lowered to the limit, demonstrating the synchronicity that exists between the two waves. The principle of synchronicity also means that cycles are the same length in different markets also tend to reach extremes at the same time.
the Principle of proportionality is used to describe the relationship between period and amplitude of the cycle. Cycle with larger period must have proportionately larger amplitude. The amplitude (or height) of the forty-day cycle, for example, should be approximately twice the amplitude of a twenty-day cycle.
the Principles of variation and rating
There are two principles of the theory of cycles that describe the functioning of cycles in more General forms. These are the principles of variation and rating.
the Principle variation is the recognition of the fact that all of the already mentioned principles (summation, harmonicity, synchronicity, and proportionality) is possible to call sustainable trends than rules. In real life, should and did happen, some "variations".
the principle of the rating is based on the assumption that, despite the peculiarities of different markets and some differences in the application of cyclic principles, there is the so-called nominal set of harmonically related cycles that are typical for any and all markets. It follows that the nominal model of cycle times can be used as a starting point in analyzing any market. The above example presents a simplified nominal model.
the Dominant cycles
For the price dynamics of the markets affected by various cycles. However, for predictive purposes the real value, are only the so-called dominant cycles, which have a permanent impact on prices and can be clearly defined. In most markets there is, at least, five dominant cycles.
the Correct procedure is one in which the study begins with the long-term dominant cycles, the length of which reaches several years. Then move to the analysis of secondary cycles that constitute several weeks or months. And finally, a super-short cycles, the length of which is limited to a few hours or days, are used to determine the optimum point of market entry or exit and to confirm the turning points of long-term cycles.
Experts in the cyclical analysis does not have consensus regarding the principles of classification of cycles and their length, but we still try to identify the main categories of cycles. They are:
long-term cycles (long-term) (length of two years or more); seasonal cycles (seasonal) (one year); the main (primary); intermediate cycles (intermediate) (nine to twenty-six weeks), and trading cycles (trading) (four weeks).
This basic cycle, but there are others. In some markets, between primary and trading cycles part of the cycle, which is the main half (1/2 primary cycle). Sales cycle can be broken into two shorter cycles — alpha and beta, each of which occurs on average within two weeks (for the first time the terms "primary", "shopping", "alpha" and "beta" to describe the cycles was introduced by W. Brassero).
the Kondratieff Wave
However, the development of markets is also determined by the cycles of longer duration. Probably the most famous is the years of the Kondratieff cycle (Kondratieff cycle). Cycle, defining economic development for a long period and is named after who discovered it in the twenties of the last century Russian economist Nikolai Kondratieff, has caused and continues to cause a lot of controversy.
However, the cycle does have a strong influence on the development of virtually all securities markets and commodity futures. In particular, the years of the cycle was identified in the fluctuation of interest rates, copper prices, cotton, wheat, stocks, and wholesale commodity prices. Kondratyev traced the development cycle starting from 1789 on such factors as commodity prices, the level of iron production, wages for agricultural workers in England and so on.
In recent years, interest in the Kondratiev cycle again increased sharply. The reason is that according to the theory of the Russian scientist, the next a depression of economic activity occurs in 2010.
the Combination of cycles of different lengths
as a General rule — the basic trend of development of the market determine the long-term and seasonal cycles. When a two-year cycle reaches its base, for at least one year prices will rise (when measuring the cycle from bottom to top). Thus, the long — term cycles influence the main direction of the market. Market development is also subject to annual seasonal cycles, in other words, the market reaches the top or bottom at certain times of the year. For example, in the markets of grain prices fall to minimum values in the period of harvest, and then begin to grow. Seasonal movements usually last for several months.
the Greatest interest is the basic weekly cycle. Three to six months, the main loop is equivalent to the intermediate trends and allow you to determine on which side of the market to open position. Then, reduction should be a four-week sales cycle, which sets the point of entry and exit from the market in accordance with the prevailing market trend. If the main trend — rising, to open long positions should be at the base of the sales cycle. When a downward trend when the cycle peaks should produce the sale. For even more precise time of the transactions you can use a ten-day cycles alpha and beta.
one of the main rules of technical analysis, all operations should be carried out exclusively in the direction of the existing trend. Short-term price drop should be used for opening long positions if market development was largely determined by the intermediate rising trend, and Vice versa, it should take a short position when price surges on the background of a General decline.
Thus, analyzing the short term trend to determine the best point of entry (or exit), you first need to set the direction of the longer trends to the next level and open positions in accordance with it. The direction of the cycle is determined by the direction of the next higher cycle. In other words, the direction of the short cycle can be set before it will become clear the longer direction.
Dvadtsativosmidnevnogo sales cycle
There is another important short-term cycle which governs the development of most commodity markets — dvadtsativosmidnevnogo sales cycle. Many markets do have a tendency to develop on trade-cycle, which is every four weeks reaches its bottom point. One of the possible explanations for this sustained cycles observed in almost all markets, can serve as a lunar cycle. In the thirties of the last century dvadtsativosmidnevnogo the cycle of development of the wheat market studied B. Pugh.
the Researcher came to the conclusion that the twists and turns on these markets has some impact the development of the lunar phases, and even made such a conclusion: to buy wheat should be in the full moon period, and sell at the birth of the new moon. B. Drink at the same time recognized that the effect of lunar phases is relatively weak in nature and often overlap with the effects of longer cycles or major events, economic or otherwise.
to him does anything the moon or not, the average dvadtsativosmidnevnogo cycle still exists and explains the prevalence of many of the numbers used in the creation of short term indicators and trading systems. First, dvadtsativosmidnevnogo cycle based on the structure of the calendar month it corresponds to four weeks. If we take into account only working or business days, then he becomes a twenty. A very popular five-, ten - and twenty-day moving averages, and their derivatives — four-, nine - and vosemnadtsatiletnie.
The existence of a four-week trade cycle explains the popularity of this number and helps us to understand why the "rule of four weeks" so successfully working for many years. When the market overlaps the previous maximum price value that is set within four weeks, the principle of cyclicity suggests that, at least, reached its bottom point and turned up the following, in ascending order, the eight-week cycle.
the Left and right offset
Left (or right) shift is called a shift cycle peaks to the left (or right) from the ideal center. For example, measuring twenty-day trading cycle is performed from the lower to the bottom. The perfect peak of this cycle, therefore, is at a distance of ten days from its beginning, or strictly in the middle. This design cycle consists of a ten-day rise in prices, followed by a ten-day fall. However, the ideal development cycle is extremely rare. It should be remembered that any deviation in the cyclical development of the perfect have to the top of the loop rather than at the base. Therefore, the lower points of the cycles are considered to be more reliable parameters and are used to measure the length of the cycle.
the Location of the top points of the cycle can be different and depends on the direction of development, the next higher cycle. If a longer trend is defined as upward, the top loop moves to the right from a perfect center, then there is a right offset. In a downward trend the top to deep left center, causing the left bias. Thus, the right offset is a manifestation of the bull market, and left bias is bearish. The bullish development of the market for the price increase lasts longer than the fall. In a bearish development the opposite is happening. Isn't it reminds you the basic definition of trend — with one exception: here we are talking about time, not price.
You certainly remember that the rising trend is defined as a series of sequentially rising peaks and troughs. The downward trend is a series of sequentially decreasing peaks and troughs. In the peaks and recessions trends are easily recognized upper and lower points of the development cycle. Now we can try to combine the concept of trends and bias as shown above. When the levels of peaks and valleys increase (that is, prices are rising steadily), the peaks of the cycles are moved to the right of the ideal center.
When the levels of peaks and valleys decreases (that is, prices are falling steadily), the loop is the vertices used, that is to the left of the ideal center. Only in one case the top of the cycle coincides with the ideal center — when there is no pronounced trend prices move in the horizontal "shopping" corridor, indicating that the strength of bulls and bears are in balance.
now let's look at the predictive capability possessed by the right and left offset. Let's start with what is already on the location of the peak of the cycle relative to the ideal center can accurately judge the direction of market development. So, if the peak moves to the right, that is, if the last part of the growth of prices for the time longer than the last period of falling prices, we can expect that the rising trend will continue.
When the vertex moves to the left, it can be regarded as an early signal of change of trend. In relation to the daily charts, the analysis of the displacement of the vertices in the cycle to hold very simple — just compare the number of days during which the market was going up and down. On the same principle, you can analyze the weekly and monthly charts.
for Example, if the market follows a downward trend and last period of falling prices was twelve days, the subsequent revival of the market is unlikely to last more than twelve days. From this we can draw two important conclusions. First, if the market recovery continues as the twelve days period is nearing completion, we can with high probability predict the exact day that we will have a turn of the market, if the downward trend is destined to resume. If the recovery extends beyond a twelve period, it signals a trend change.
the same methods are used in the analysis of weekly charts. Suppose that prices steadily rise. The distance from the bottom to the top of the last upward movement of prices the market was seven weeks. This means that any correction in prices down or horizontal consolidation should not last more than seven weeks. This temporary restriction can be combined with defined price parameters. The maximum correction of the prices downwards is usually from 50% to 66% of previous growth.
, Seasonal cycles
Almost all commodity futures markets in one way or another exposed to annual seasonal cycles. When we speak of a seasonal cycle or seasonal model, we mean the tendency of markets at certain times of the year to move in a certain direction.
the Most striking example of such effect is the dynamics of prices on the grain markets. Prices invariably fall into the harvest period, when the market appears the maximum amount of grain. For example, in the markets of soybeans, 70% of all seasonal price peaks occur in the period from April to July, and 75% minima — for the period from August to November. After reached the maximum or minimum seasonal price, prices begin to fall (or to grow). Seasonal decline (or growth) usually lasts for several months. Thus, the knowledge of the seasonal dynamics of prices is a good help when developing a trading strategy.
the Reasons for the seasonal effects on the dynamics of prices, leading to the appearance of tops and bottoms at certain times of the year, especially evident in the markets of agricultural products. However, almost all markets are influenced by seasonal factors. According to one of the most common patterns that apply to all markets breakout of the January highs is a bullish signal.
the metal Markets can also serve as examples of the impact on prices of the seasonal factor. For example, on the copper market from Jan-Feb there was a strong stable seasonal price rise that tends to reach a peak in March or April. In the gold market seasonal growth starts in January, and prices reach the next base in August. The price of silver usually falls to lowest level in January, then steadily increasing until March.
the Analysis of frequency of seasonal movements of the market over the previous years schedules seasonal trends. They can be used to determine the probability of manifestation of certain seasonal patterns for each month and each week of the year. By the way, is a great tool to identify seasonal trends.
In some years, prices refuse to follow the expected seasonal trend and trader should closely monitor the appearance of signals of this kind. The ability to notice the violation of the seasonal patterns in the movement of prices is of great importance, allowing the trader time to rethink the strategy of trading. The failure of the market to follow the seasonal trends typically means that we should expect a significant price movement in the opposite direction. The opportunity to learn that you made the wrong move — one of the main advantages of technical analysis in General and analysis of seasonal cycles in particular.
Using cycles and technical analysis
Analysts, who study market cycles, emphasize that in order to confirm the feasibility of opening one or another position, the results of the cyclic analysis needs to be combined with signals of other technical tools. For example, to get an idea of when it should be the turn of the cycle, the analyst can use time Windows (time windows) or temporary lines (timing bands), which are a species of temporary filters that can "screen out" no significant price movements.
However, once the rates included in the time window, the trader needs to resort to more traditional technical tools that can confirm the fact of the rotation cycle, thereby giving a signal to action. The choice of specific methods to determine the most favorable time to enter and exit the market, the trader who prefers to rely on the favorite, the most familiar tools for it.
the timing window have no meaning, unless used in combination with specific technical signals. Among the signals which are considered the most important breakthroughs of trend lines, deferred using the closing price, days key fracture and breakthroughs closing level of the maximum or minimum closing price recorded in the last three days (or other time units).
For example, a buy signal at the low point of the cycle will occur when the closing price reaches the value above the maximum closing price over the last three days (or three weeks for the weekly chart).
the Company HAL Market Cycles of Bresser uses the concept of time and price (the graphs are marked in small rectangles). Timelines based on semidesyatiletnego time bands that are defined separately for each cycle length. Here we have in mind that in 70% of cases, the rotation cycle will occur within this band.
Combined analysis by price and time targets for Brasero involves the use of various technical methods, including the definition of benchmark by the pause in the Central point of the cycle (midcycle pause price objective) (a technique similar to determining price targets by the method of "measured progress", which we already told earlier), sixty-coronarienne the ratio of the length correction, the analysis of levels of support and resistance trend lines. Bresser, emphasizes the need to harmonize these methods with the substantive provisions of the theory of cyclicity.
for Example, methods of a pause in the Central point of the cycle and percentage of length of the correction is reliable only if, first, the length of the analyzed period coincides with a prescribed, and secondly, if the tendency, expressed as the next higher cycle.
the trend Line is most reliable when they connect the tops or bottoms of cycles of the same length. For example, the trend line should be build in such a way that they connected the upper or lower point of the two trade cycles or neighboring cycles alpha or beta, which, as a rule, have the same length. Breakthrough of the trend line connecting the cycles of the same length, is a signal that there was a turn, the next higher cycle.
So, if the market crosses the descending trendline drawn through the vertices of cycles alpha and beta, that means a longer sales cycle reached its base.
Using cycles and oscillators
One of the most interesting areas of joint use of loops and other more traditional methods of technical analysis is a binding of oscillators to current cycles. Experts believe that the effectiveness of the oscillators can be significantly enhanced if the time periods used for their calculation, to determine taking into account the extent of existing market cycles.
the book, dedicated to the application of the method Hal authored by W. J. Bresser and. Jones (The Hal Blue Book, W. J. Bressert and J. H. Jones), described as the cycles of development of the market combined with the index overbought-oversold index and momentum (momentum). Both oscillators is taken from the book of Larry Williams "How I earned a million dollars last year, playing in a market of commodity futures", published in 1973. The index is overbought-oversold is a modification of the oscillator, %R Williams, and the second oscillator is a simple index rate, which can be constructed by measuring the difference between the two time periods.
the Main thing is to tie the calculation period of the oscillator to the length of the cycles. To begin with, we define the number of working days that constitute the trade cycle. Assume that the average length of the sales cycle is 28 calendar days. However these working days — only twenty. When we use oscillator I try to identify turns any cycle, you need to calculate it, take the period equal to half the length of this cycle. In the example given below, we used a period of ten days:
Hal Method involves the construction of three oscillators, based on three cycles of different lengths: sales (twenty days), the alpha-beta (ten days) and long (usually twice as long shopping, i.e. forty days). Of course, we are talking about cycles of average length, and you always need to take into account the actual length of the cycle in each market. When building oscillators in each of the three cases does the period corresponding to the half cycle of each type. In our example it will be the following values: 20, 10 and 5:
Oscillators based on these three values, you can defer on one or on different schedules. The interaction of oscillators of different lengths can give the trader extremely valuable information.
Another way to combine oscillators with cycles is the use of time bands as a filter. In this case, particular care is necessary to monitor the oscillator on the subject of signs of tops or bottoms in those moments when prices enter into the limits of the temporary lanes, indicating the approach of the cycle to their upper or lower point.
the principle of the "binding" of the oscillators to the length of cycles you can use in building almost any type of oscillators, inserting the appropriate value in their formulas.
Today we examined in detail the possibilities offered by the trader the analysis of time cycles. You do not need to be an expert in the field of analysis cycles in order to see the benefits that we get, including our predictions in the temporal dimension. To do this, as we found out, is quite simple. In combination with the analysis of cycles, for example, you can use the methods of technical analysis, you always use. Specialists in cyclical analysis believe that only using loops, you can advance to see in which direction the market will go. True or not, but one thing is certain: through the analysis of cycles you can really raise the effectiveness of market forecasting.
the Base cycle analysis is considered more reliable than the vertex, and therefore, cyclic changes are measured from the bottom to the bottom. That is why the analyst draws attention primarily on the base of the cycles. Unfortunately, this leads to the fact that the analyst occurs an obsession to "catch base" loop and play to improve instead of quietly follow the downward trend.
if you cyclical analysis is best likely to pay less attention to cycles during the bearish phases of the market development and re-refer to them when prices start to follow a confirmed bullish trend.
best regards, Dmitry aka Silentspec
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