Intraday trading with cycles

Intraday trading with cycles

Cycles are an integral part of our lives. A cycle is a repeating movement in the time, in which upwards and downwards movements alternate each other. The sun rises every day, tides appear every twelve hours, and every 28 days there is full moon. There are cycles in the financial markets as well. For example, there is the very long Kondratieff cycle, the Kitchen cycle, the Juglar cycle, and so forth. For traders however, these cycles are not very interesting. We focus on much shorter cycles, which we will elaborate on later. First, a brief introduction to the theory of cycles.

Cycles of 20 price bars

Markets tend to bottom in a certain regularity. This goes for all markets regardless of the “timeframe” you are looking at (long term to very short term). Many investors only look at prices but time is just as important, perhaps even more important. The study of cycles gives you a kind of guideline of where the market is and what can be expected. For most financial markets a cycle consists of an average of 20 bars with a bandwidth of 15-25 bars. This applies to all time frames; monthly, weekly, daily, hourly, etc.

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Double Stochastic

The Double Stochastic is always measured from bottom to bottom. Through an RSI (Set to 2), you can already recognize many bottoms if they fall within the time bandwidth. In case of a bottom, the RSI should be under the 10-line. Walter Bressert invented the Double Stochastic, a variant of the Stochastic indicator, which indicates virtually all bottoms (and tops). The indicator moves between 0 and 100. The indicator will be under the 30-line if a bottom is formed. This is the 10-period Double Stochastic. The five-period Double Stochastic indicates shorter cycles and is used to distinguish the cyclic subdivision of a cycle (this will be made clear in a later example). The Double Stochastic indicator is part of many software programs and can be easily adjusted in terms of length and other settings.

Dynamic cycles

A cycle of an average of 20 bars usually consists of two cycle halves. The bottom located in between these cycle halves is also called the “Mid Cycle Low”. This “Mid Cycle Low” can easily be recognised by the 5-period Double Stochastic, which is located far below the 30-line (usually even below the 10-line). Price peaks are not always nicely in the middle of the cycle. When a cycle top is formed early on this is called “left translation”. This is a bearish signal. The top is located to the left of the middle of the cycle. A late top has the characteristics of “right translation”. The top lies to the right of the middle. This is a clearly bullish signal.

During an uptrend you usually see tops that are located to the right of the middle. During downward trends the tops are usually to left of the middle. The cycle concept applies to all markets and all time frames. Using them to make money however is obviously not so easy, because the cycles have a rather dynamic nature (length and location of the tops). Trading with the direction of the trend prevents a lot of mistakes and increases the success rate significantly. It also reduces risk. 

Trends can be detected and determined through the use of indicators (I For example use a longer MACD or two MA’s of 23 and 50 bars), but also by looking at the cycle from one time frame longer. For example, if you trade on a 15-minute chart, you should also look at the cycle of the hourly chart. If the hourly chart is clearly in an uptrend, the trend for the coming hours is upwards and you can use the 15-minute chart to buy cycle bottoms. By combining cycles of several time frames the trader will get an insight into the bigger picture: what is the importance of this cycle measured at the higher time frames? This provides insight into the potential of a trade and its risk. This way, a kind of road map for the next few hours or days will appear.

Overview of the various time frames

Below is an overview of how you can use various chart settings to look “in the future”.

 

  • 480-min chart: insight in the next 5-8 days

  • 240-min chart: insight in the next 3-5 days

  • 120-min chart: insight in the next 1-2 days

  • 60-min chart: insight in the next 6 hours

  • 30-min chart: insight in the next 3 hours

  • 15-min chart: insight in the next 1-2 hours

  • 2-5-min chart: time frame for precise timing of entry and exit

Below is an overview of the division of cycles. Each cycle is part of a larger cycle.

 

  • 480-min chart: consists of 2-3 cycles of 240 minutes

  • 240-min chart: consists of 2-3 cycles of 120 minutes

  • 120-min chart: consists of 2-3 cycles of 60 minutes

  • 60-min chart: consists of 2-3 cycles of 30 minutes

  • 30-min chart: consists of 2-3 cycles of 15 minutes

  • 15-min chart: consists of 2-4 cycles of 5-minute

 

The bottom of a cycle of e.g. 60-minutes is also the bottom of a cycle of 30-minutes and 15-minutes. Even if you are only trading 15-minute charts, for example, you’ll have to take into account at least the cycles of the 30, 60 and 120-minute charts. It further holds that the beginning of each cycle is the most “bullish”; the end is the most bearish. After a bottom in the 60-minute cycle, the first and probably the second 15-minute cycle will show “right translation”. In other words, it pays to hold the position for a longer period and not to take profits too early. If the cycle comes to its end, the probability of a bearish turnaround increases. Then short positions become interesting.

Example

I will end this introductory article with an example of the German Dax future. I trade the Dax a lot, in particular on cycle trading 1 hour chart cycle trading 5 minute chart cycle trading 15 minute chartthe 15-minute chart, where I use two MAs and watch the hourly chart to determine the trend. The 5-minutes and 2-minute charts are used to determine the exact entry point. 

The first graph is the 60-minute chart. We see that the two moving averages indicate a rising trend. It is a tool which indicates that we should focus especially on buying cycle bottoms. In addition, it indicates that the probability of “Right” translation is quite large, going short is therefore dangerous. In the graph I have marked the cycle bottoms by means of the arrows. Below the graph are the red (Double Stochastic with setting 10) and the blue (Double Stochastic with setting 5) cycle indicators. We see that the red indicator is well below 30 in cycle bottoms (Which on average lie 20 bars from each other), usually even around or under 10. The shorter indicator indicates the shorter cycle and often makes two bottoms and tops within a whole cycle, but will always bottom out together with the longer indicator in case of a real cycle bottom. When both indicators curl upward, we obtain the signal. However, we know approximately when we can expect a bottom, because we can count the bars and see if the indicators drop below 30 (10). We can therefore already prepare ourselves before we get confirmation in the hourly chart by looking at the 15-minute chart.

In the second chart we see the blue box from the hourly chart, in which we expected the bottom to e set. We also see that in this box both indicators are curling upward near the red vertical line, after both of them had fallen below the 30-line. This is the signal that there is a bottom in the 15-minute chart or at least that we are very close to sit (sometimes the price declines a bit further while the indicators already start to increase ). Because we know that the bottom of the hourly cycle is also right there, we can prepare for a large increase. The beginning of each cycle is the most “bullish” and of course this goes more for the beginning of an hour cycle than for the beginning of a 15-minute cycle.

The last graph shows the 5-minute chart. The red vertical line indicates the turning point of the 15-minute cycle. We can now blindly push the buy button, but it is better to wait for some kind of confirmation, for example, a buy signal in the MACD (lowest indicator on 5-minute graph) or a pullback of the price, which we can recognize when the RSI 2 drops below the 10-line. Of course, there are several other techniques available to determine the exact entry point.

Conclusion

This article provides an introductory argument that you can also use cycles on an intraday basis. It is even an instrument which provides daily opportunities with a high possibility of success. My advice: take a look at several charts with the Double Stochastic and follow this indicator in a while. You should also count the number of price bars between the bottoms. Over time you will develop a certain feeling for this cycle indicator, which is a more than a useful addition to the toolbox of a trader. 

Blog

This article explains the concept of cycle trading, a trading strategy I frequently use and which is very successful if applied in the right manner. In our cycle trading blog we post weekly updates in which I discuss the developments in several markets (i.e., S&P 500, DAX, Dow Jones, Gold, Bund, and more) based on the cycle trading methodology.

If you want to start trading or practicing the cycle trading strategy the broker I recommend is Plus500. You will get a free demo account if you open an account with Plus500. For more information about this broker visit the Plus500 broker review page. Or visit the general broker review page to compare the best brokers and find the one that best suits your needs.