About "Trading with Cycles"

In theory, trading with cycles it is an easy job, buy at the start and sell at the top of the cycle.

This is just a variation of the old buy-low, sell-high concept.

In practice, trading with cycles is very more difficult. The very existence of market cycles is ephemeral and one must jump on them quickly to take advantage of any market inefficiency that they represent.

In addition, there are a number of other conditions that make trading with cycles more difficult, perhaps to the point that the real question is "when should I NOT trade with cycles?".

One of the purposes of measuring the market cycle is to determine market inefficiency because of a short term coherence. If there is a coherence in prices, we can expect that coherence to continue - at least for a short while into the future so we can close in profit our trade. We can then identify this cycle component as the "signal" we are trying to exploit.

It is possible that a perfectly measured cycle indicates to go short but if the market is in a bull trend, it is easily possible that the trend is so strong that it completely nullify the advantage of the cyclic trade. This happens often even on an intraday basis.

It is very important to estimate correctly the intensity of the trend; if there is one then trade only in the direction of the trend using an estimation of the istantaneous cycle and buying at its start or selling short at its top. In the following example you can see a downtrend channel with cycles modulating it. Sell short at the top of each cycles in a well defined downtrend of the EURO FX daily time frame.

I'll explain how to estimate the duration of the istantaneous cycle soon, in this example the cycle duration estimated was 16 days.