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CYCLICITY. That’s the word I use. Many use different names to describe the ups and downs in all markets – forex, commodities and equities. Understanding the practicalities of cycles is one of the keys to developing an effective forex strategy, and indeed one of the enduring trading edges of technical analysis.

“MEASURE your cycles, or you are simply grasping at straws…”

Objectivity is king, as always. The market will do what the market does, but unless you are very experienced (and even then), the first step should always be to develop a REPEATABLE method of measuring the market. It doesn’t matter what this is, as long as you know how it reacts in different market environments. Develop a way to

Some measurement methods:

1. Stochastic (8,3,3) – Developed by George Lane, the stochastic remains one of the enduring favourite indicators of technical analysts. This setting is relatively faster than the popular (14,3,3), but it is the one I like. The key is to look at the chart and decide what YOU see as a clear market wave or cycle. Then, adjust the setting so that the stochastic mimics it. After doing that, look back into the last 100-200 swings and look at the variations possible. Don’t use the “indicator” as an indicator per se, but as a way of measuring and recognising market cycles before they occur.

2. Zigzag – The zigzag indicator is preferred (at least by me) over the fractal indicator because it shows movements up and down more clearly. It also is much less likely to get choppy. In and of itself, the zigzag is probably insufficient as a trading strategy. However, it can be used to guide the eye in judging the swings. Combined with trend, momentum and entry triggers, this can be a very effective method for judging cycles.

The moral of the story: It doesn’t matter what method you use to judge the cycles. The key is to keep using it until you become extremely familiar with its nuances. If you intend to develop many trading strategies, it is a worthwhile study to test how several indicators measure different cycles of different sizes. You might find that you had a blind spot in reading the charts!

With best wishes for your trading,

Kaye Lee
Private Fund Trader/Head Trader Consultant
www.straighttalktrading.com
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