One of the benefits of teaching trading is the feedback and email questions I receive from students. I learn from the markets and my students challenge me to maintain my discipline and focus in trading. A recent email from a student included a chart that showed a possible chart pattern forming on the Nifty. The student noticed that the Nifty seemed to begin a trend on a certain date and end the trend on the same day of the next month.
Referring back to an older article I had written called “Cycling,” we may be able to explain this phenomenon. The markets and individual securities routinely fall into cycles that are measurable and predictable. Due to market conditions these cycles may change but most stay the same for the duration of the trend. A cycle is measured by the distance between lows. This is also referred to as the frequency of the cycle. In trader terms, the frequency will tell you when to expect lows or moves to the downside in price. Once you identify the stock’s cycle, you have a higher probability for trading in the right direction.
As I previously mentioned, cycles are measured from the lows. There is a tool on some trading platforms that will allow you to line up vertical lines with the lows on your price chart. Don’t worry if the lines do not match every low, as there are multiple cycles affecting the price at any time. You want to locate the dominant one that you can trade with. That will be the one that contains most of the lows.
If you do not have the tool, it is still easy to locate the cycle. Start by marking the lows and then count the number of candles in between those lows. They should be relatively similar. You can then take the average between those lows as your stock’s or market’s cycle.
We can do this study on any stock and for any timeframe.
The cycles will be more stable on longer term charts but knowing the cycle can assist you in your trading. If you see price approaching a supply or demand level but the cycle is not indicating a top or bottom, the level may have a higher probability of breaking. But if the cycle top or bottom is near, the levels are more likely to hold.
So while it will not be a perfect indicator, the cycle of a security can be a good odds enhancer when you are trading.