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)

Thank you

Questions?matt.caruso@analyzingmarkets.com