Short-term traders, especially those that are Day-Trading, must have the ability to execute precise timing.
Only those who are able to effectively time the markets with strong discipline can win the battle against the markets and emerge victorious.
The success rate in trading the markets, whether it be Futures and Commodities, Stocks or the Forex is very low. Only a few collect the monies invested or traded by the many.
The trader must keep in mind that in order for there to be a winner there has to be one or more losers in the business of trading. Therefore, the sharper you can get your market timing skills and emotional resolve the better off you will be.
This brings us to the subject of Cycle Analysis.
Market price behavior can be described as a combination of simple cycles, each different in both the period (cycle length) and the amplitude. Each of these are operating independently of each other, more or less. This phenomena is not a new concept but has been thoroughly studied. One such example would be the works of J. M. Hurst, a recommended author on this subject.
You may find this surprising to learn that some of the commonly used trading indicators that many traders plot on their price charts are built on the foundation of cycles. For example, consider the Stochastic, the relative strength index (RSI), moving average convergence divergence (MACD), and multiple moving average (MMA) indicators. These indicators ‘oscillate’ from a low base value to a high base value over and over again, with various oscillations (time spans). They help the trader get a sense as to where the market is likely to go next.
During the 1990’s when I was most active on trading forums, you would find some traders engaged in timing the markets based on some fixed-cycle interval. For example, you might note on the Lean Hogs chart that it was making a bottom about every 15-days, approximately. So having discovered this, you might wait until another 15-days (approximately) elapsed in order to time the next bottom and jump into a long trade.
While locating these fixed-cycle periods in the different markets was easy to do when they showed up, many traders would get burned jumping into the trade at the next interval due only to find that the pattern had disappeared, resulting in big losses.
The problem with this type of cycle analysis is that it focuses on a ‘single’ cycle, when in reality market price action is the result of several cycles combined. So while a single cycle may prove the dominant one for a short period of time, it will soon appear to vanish as the other cycles with their combined yet different periods project a different pattern. If a market only traded based on a single fixed-interval, everyone would lock onto it and no one would take the opposite side of your trades, thus no more market.
The key to cycle analysis is to find the most dominant cycle periods that are affecting a particular market and then align them correctly so that you can determine their respective amplitudes (price values) for each time period. Some cycles will be in their upward swing (positive values) and some in the negative swings (negative values). When summed up for any time period (the negative values will subtract from the positive ones), you get a composite value. Plotted on a chart, you should get basically the same swing pattern that the price chart itself is displaying.
Due to the element of randomness, no de-trending method exists that will provide a perfect comparison to current or future price action. But when it comes to trading, you do not need perfection, or a very close approximation.
To get a visual idea of what this might look like, simply plot a Stochastic oscillator onto your price chart. Note how it makes cycle swing tops and bottoms as the market does. New traders often get excited the first time they use this indicator, thinking that they’ve found the Holy Grail to market timing. Unfortunately, there are times this oscillator will get pegged at the roof (overbought) or the basement (oversold) for long periods of time. The reason for this is that the Stochastic is locked into a shorter-time period (cycle length) and several of the other cycles at work have aligned in the same direction (upwards or downwards) to overpower the one you are locked into. At some point it will return and start oscillating again. The lesson here is that you need to be aware of most of them, not just one.
By de-trending market price in order to arrive at the component parts (2-3 would be enough), you would then have the basis for plotting out when the next bottom or top is most likely to occur and use that towards your market timing of trades.
If you find this information enlightening or encouraging and would like to learn more, I would suggest reading the material from J. M. Hurst and W. D. Gann to get a good foundation on the subject.