How many times have you bought a stock, bond, or mutual fund just when the fundamentals sounded good only to look that investment leave into a protracted decline? The key to any successful strategy is buy little and sell high. But a successful implementation of that strategy requires an in-depth understanding of market cycles. The knowledge and exploitation of cycles embodies one regarding the highest many powerful analytical tools available for identifying trends and forecasting their reversals notes Stan Harley, editor or publisher of The Harley Market Letter. I have long recognized that the learn of market cycles is the key factor in understanding how markets move observes Harley. Cycles give the essential algorithm in predicting how long a trend should sprint and when to expect reversals.
Studying the chart the past of a stock or index shall reveal that there are, indeed, rhythmical beats that define the up and below market movements. But, like any stream of data comprising a solution set, the time period between cyclical occurrences shall vary from beat to beat. At times an above occurs where a little is expected. And not every projected cyclical turn conclusions in an economy reversal of importance. At other times, the larger, more-dominant trend should be so tough that the shorter-term cycles shall seemingly disappear or skip a beat.
A 50 percent phase shift neither forward or backward is not uncommon at times either. All of these peculiarities present frustration to many traders and investors receiving note of for the holy-grail. Investors should recognize that these windows of times are ones to monitor for the potential but not the certainty for a cyclical trend change to occur. Cyclical analysis is a top-down approach Harley advises. Identify the longest dominant cycle, then work below to the smallest cycle affecting cost activity.
Most cycles have subcycles embedded within them, usually 3 or three, which Harley refers to as the alpha, bravo, and charlie components. When an exact cycle is nearing its trough, it shall tend to dominate the shorter cycles which comprise it, causing them to contract or expand beyond their usual frequency schedule. Harley defines 3 essential elements compulsory in cyclical analysis. First element requires an awareness regarding the numerology underlying the derivation in market cycles. Most market cycles have their roots grounded in fibonacci numerology Harley has found.
The 2nd element requires that the analyst employ statistical analysis to verify the numerology premise and give mathematical organization computation regarding the central tendency and its variation to the data below study. The third element involves the development of properly drafted tracking tools that can measure the cyclical function below learn and recognize its turn in as close to real time as possible. Long-term readers of The Harley Market Letter are aware that in performing cyclical analysis regarding the financial markets, it shall many times be located that the time period taken for one done cyclical rhythm shall vary from beat to beat. To ascertain the central tendency regarding the data, Harley performs a statistical analysis regarding the data. From this analysis, he uses most the mean and the median regarding the data to project the window of time for the next reversal point.
Skills development has taught him that even though a cycle has had a the past of market lows, it shall not necessarily make another little at the next occurrence. One has to be ready for a little or an above to occur. However, it is little higher than academic to have knowledge of that a cycle has occurred within the past like a trader, investor, and newsletter author, it is critical to have knowledge of that a cycle high or little is occurring within the present necessitating the need for mathematical tools than can track a cycle in real time. One regarding the tools Harley employs involves the calculation regarding the rate of change in cost the slope at which a stock or commodity moves up or down. So called market momentum is really no momentum at all, for those with a background in physics or engineering shall recognize that any measurement of cost over time is correctly called cost velocity.
For a cost velocity indicator to be valid, it should be based on cycle length. If it is, the indicator shall correctly measure the rate of change of prices with a cycle and turn up or below as the cycle itself turns up or down. The other calculation the analyst should perform involves determining trend through measurement of cost range. Any range-based measurement stochastic, percentage range, or relative strength indicator shall do. The important spot is to employ the calculations over multiple time periods no fewer than three.
A trade-execution signal should be generated when most sets of indicators cost velocity and cost section turn together within the desired trading direction. Cyclical turns should be reflected in a many ways. Sometimes they mark the exact little or high regarding the move. Sometimes they mark a retest point. At other times they can be marked by the apex of a sideways pattern that conclusions in an expansion to the upside or to the downside.
It's not always likely to have knowledge of in advance which regarding the aforementioned shall define the cyclical structure until subsequent to the fact. One shape or a multiplicity of forms shall occur. Harley defines the cyclical turn as the spot at which cost velocity balloons within the direction opposite regarding the trend that preceded it. In a bottoming evolution, for example, the time spot that immediately precedes the spot at which cost velocity suddenly expands to the upside is the cycle little spot in his definition. One final characteristic of cyclical behavior involves the concept of translation.
In bull markets, there is the tendency for the cycle high crest to occur to the right regarding the midpoint regarding the cycle. This is known as right translation, with prices rising for a greater no. of time to the high than it takes to decline to its next low, and is characteristic of bull market cyclical structure. In bear markets, the similar to cyclical schedule from low-to-low is retained, but there is the tendency for the cycle high to occur to the left regarding the midpoint regarding the cycle. This is known as left translation, with prices rising for a shorter no.
of time to the high than it takes to decline to it next low, and is characteristic of bear market cyclical structure. Knowing when to buy and when to sell is the cardinal axiom for successful investing. The knowledge and exploitation of market cycles embodies one regarding the highest many powerful analytical tools available for identifying trends and forecasting their reversals. But market cycles not ever present the investor with a magical formula that shall time an economy upturn to the precise moment. What they do afford, in objective fashion, is a means to quantify the timing of your investment decisions.