CYCLE INDICATORS. The Theory and Techniques of using Cycle analysis for Forex Trading

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Ferdinand McKinney
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CYCLE INDICATORS The Theory and Techniques of using Cycle analysis for Forex Trading The study of Forex cycles is the most important part of this course.

1 CYCLE INDICATORS The Theory and Techniques of using Cycle analysis for Forex Trading The study of Forex cycles is the most important part of this course. When you learn to read cycles you ll know what the market is going to do and of course if you know this, making money should follow. In live Forex trading different time periods are used in the analysis of the cycles to determine the trend and the execution of the trade. As you will see, the examples shown will mostly deal with the 60 minute period for longer term cycle indications and the 15 minute period for the execution of the trade. When we come to the practical trading section cycles in 3 periods namely the 60, 15 and 10 minute periods are used Every second of every day, as the Forex market s trade, cycles are formed. From these cycles we can see where the peaks and lows are and what direction the market is going to take. I m now going to show you the peaks and lows of the GBP/USD in a 60 minute period price graph Cycle Trends uses cycles to forecast these peaks and low points and to predict future moves. Note on the graph the rising highs and lows to Peak D pointing to a rising trend. The low at point E could be the start of a falling trend. In trading it is very important to establish the trend. The pattern of highs and lows is one of the ways of deciding on the trend.

Okay, let me give you some facts about cycles: There are 2 types of Cycles: There are regular cycles like the day/night cycle which allows us to predict sunrises and sunsets, and the rotation of the

2 Okay, let me give you some facts about cycles: There are 2 types of Cycles: There are regular cycles like the day/night cycle which allows us to predict sunrises and sunsets, and the rotation of the earth round the sun. Then we have cycles that do not occur on a regular basis. These irregular cycles are inherent in the Stock, Financial and Forex markets! What Cycle Trends can do for you is to convert these irregular cycles of different period lengths into one regular cycle which can identify peaks, low points and trends! This 15 minute graph of the GBP/USD demonstrates the characteristics of a cycle. As you can see, a cycle moves from one low point to a peak and then back to another low point. This is known as the period of the cycle. On this chart you can see clearly that the GBP/USD in its movement has cycles of different period lengths. The other important characteristic of a cycle is what s known as its amplitude. This refers to the height and depth of the wave above and below its axis. Generally speaking, the more height the amplitude has, the stronger and more reliable the cycle will be. So how does the program convert these irregular cycles of different periods and amplitudes into one regular cycle that can be used for forecasting?

3 It does it in 3 stages. In stage 1: The program examines each cycle, pointing out those that are repeating themselves, that have the biggest amplitude and that have the best fit to past data. It s pretty straightforward and logical. The theory is that if the cycles have been repeating themselves they will keep doing so and can therefore be used for prediction! In stage 2: The statistical reliability of each cycle is tested. The Cycles that have been repeating themselves consistently in the data are identified. These are known as Genuine Cycles. In stage 3: Cycles that have passed what s called the Bartels Test are added into the analysis. Don t get confused by this term. Bartel cycles are cycles that can withstand random events such as sudden announcements on interest rates and bank failures that would affect the normal, regular movement of the cycle. Bartel cycles play an important role in Forex trading From these 3 stages cycles are computed which will be used to predict the trend, peaks and lows of the currency being traded. In addition the program develops the different cycle combinations used in the different periods. For example cycles that are used in the 60 minute trading period differ from those used in the 15 minute period The function of the cycle is to forecast the direction of the price. It does this by showing the direction it is taking in the future zone. The future zone as shown in the graph below is the focus of the trader s attention The trader is also looking for the peaks and lows traced by the cycle and where they are in relation to the moment he is examining the graph The program gives you the option of using one of two different cycle indicators : Cycles Trig or Cycles Array. The difference between Cycles Trig and Cycles Array is in the maths that the software uses to form the cycles. Here is the graphic picture of a 60 minute candle sticks graph of the Euro/USD showing the difference between Cycles Trig and Cycles Array:

In Forex trading we can use both Trig and Array cycles with Array the preferred choice. In equity trading Trig cycles give a more definite picture.

4 In Forex trading we can use both Trig and Array cycles with Array the preferred choice. In equity trading Trig cycles give a more definite picture. The graph shows that the Array cycles consists of a Smooth and an Array line. The Array line is jagged and shows the trend direction more clearly than the Trigs cycle when the price is in candle sticks style. The Cycles Array cycle in the graph above is clearly forming a cycle bottom at the start of the future zone with the trend direction first moving up then down. The Trig cycle consists of a single curve with a forecast into the future zone. There are different Cycle options but in Forex practical trading we use Array All in all the time frames as a routine. Consistent results are achieved this way. You will also see in the practical training session that in Forex trading we analyse the Cycle direction in 3 time frames namely 60, 15 and 10 minutes. It is important you realize that each market develops its own profile of cycles that influence its price direction and course. It seems obvious to say it but the cycles that are developed will differ from one market to another and from one currency to another. In addition it will differ from one time frame to another. Before we move on I should point out that cycles are recalculated every time new data is added to the program. Cycle Trends is not fixed as many other signal softwares are and that s what makes it more accurate in my opinion. Now let s discuss what else Cycle Trends can do to support the analysis of your cycle forecast.

You see, a cycle peak or low and it s direction in the future zone may tell you that there is a window of opportunity at hand but you also need other indicators to confirm beyond doubt that you need

5 You see, a cycle peak or low and it s direction in the future zone may tell you that there is a window of opportunity at hand but you also need other indicators to confirm beyond doubt that you need to take action and get your trade on! The two other important cycle indicators that are used for confirmation are the indicators we have named TrueOBOS and Trendic. To demonstrate the TrueOBOS indicator I will use the 15 minute chart of the Euro/USD again. The OBOS in TrueOBOS stands for Overbought, Oversold. This indicator is considered by many to be the most important part of the Cycle Trends program. TrueOBOS is derived from what s called the Fourier trend line that you see as the red curve on the price graph. The TrueOBOS indicator in this graph is technically overbought at points A on the thick red line concurring with the peaks of the Array All cycle. Let me show you how TrueOBOS works: The thin red and green lines are 1 MAPD or (Mean Absolute Percentage Deviation) away from the Fourier line and the thicker lines are 2 MAPD s away. The currency becomes much oversold when TrueOBOS reaches the thick green line and mildly oversold at the thin green line. It becomes much overbought at the thick red line and mildly overbought at the thinner red line. The important thing to remember is that cycle lows should coincide with TrueOBOS readings that are at oversold levels, i.e. below the green lines or at previous oversold levels.

What you should do is simple: Think about buying when the market is over or close to the green oversold line and think about selling when it is over or close to the red overbought line!

6 What you should do is simple: Think about buying when the market is over or close to the green oversold line and think about selling when it is over or close to the red overbought line! In this example, the price peak, the cycle peak and TrueOBOS are at the same point A pointing to a selling opportunity. Up to this point we have shown how the cycles and the overbought oversold indicator TrueOBOS can signal buying or selling opportunities. All we need now is a trigger to prompt us to buy. Cycle Trends has 3 different triggers, Trendic,Trend line penetrations and MACD. Trendic is the trigger that we have developed specifically for the Cycle Trends Forex program and is our first choice in the short term time frames. Together with trend line breakouts Trendic is an excellent indicator to trigger buy and sell signals. Trendic is 100% original and is derived from the incline of the Fourier trend, seen as the red line on the price graph. Here are the Trendic Indicators with the Array Cycles and MACD in this Euro/USD 15 minute graph: Take a look at the Trendic indicators in Box 3 and 4. Trendic is an indication of the immediate trend of the currency under analysis. The absolute rule is that you never trade against the immediate trend. The number tells you how many cycles are in the Fourier line. Trendic 55 in Box 3 corresponds to 55 cycles in the Fourier line. The more cycles there are the faster the signal tends to be.

7 Trendic 21 in Box 4 corresponds to 21 cycles in the Fourier line and is a slower trigger. This is how Trendic works: When the Trendic line moves from the minus field through zero into positive, a positive immediate trend is triggered. And when the Trendic line moves from the positive field past the zero line into negative, a negative immediate trend is triggered. You will see in the sector when discussing trading techniques that we use more than one Trendic in our analysis when deciding when to enter or exit a trade. The 3 Trendic speeds that we use are 55 (fast), 36 (medium) and 21 (slow). All 3 must be pointing in the same direction to give the direction of the immediate trend. In the graph above we are combining Trendic 55 and Trendic 21. The Euro/USD has fallen to a support trend line. Will it penetrate the support? Analysis of the graph above The Array All cycles in Box 2 are forecasting a negative direction for the Euro/USD suggesting that the support will be penetrated and that there will be an opportunity to short the EuroUSD. What is now needed is a signal from the Trendic indicators to trigger the short sale. Taking a closer look at both Trendics we can see that Trendic 21 is in the negative field but Trendic 55 is still in the positive field. It would have to move into the negative field to confirm that the trend was definitely down and the Euro/USD should be shorted. MACD The MACD indicator shown in Box 5 also functions as a trigger. MACD has 2 lines, a MACD line and a Signal line. A buy or sell signal is triggered when the MACD line crosses the Signal line. On the graph the MACD line is about to cross the Signal line to confirm the direction of the Array All cycles in the second box. The MACD indicator is inclined to lag the Trendic signals This concludes the sector on the Cycle Indicators.

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