Cycles in Prices

Success in the futures markets requires adhering to the old adage of “trade with the trend.” If the trend is up, buy the dips; if the trend is down, sell the rallies. What the trend was is relatively easy to see on a chart; what the trend will be is often another question. Foreknowledge of the trend, or of a trend reversal, is every commodity trader’s dream.

The use of cycles is one of the most powerful analytical tools for identifying trends and trend reversals. Once a cycle has bottomed, the trend will be up until the cycle tops; once the cycle has topped the trend will be down until the cycle bottoms. How long the trend will be up or down depends upon the length of the cycle.

Each market has an individual cycle profile which consists of several dominant cycles that visibly and consistently affect prices. Once these dominant cycles have been identified future price expectations can be established and tops and bottoms identified as they occur. Therefore, the basic principle in cyclical analysis is to identify the longest dominant cycle affecting price activity, and, then to work down, cycle-by-cycle, to the smallest dominant cycle you wish to trade. When the dominant long-term cycles have been determined, they will provide an overview of expected price movement and trend.

Then weekly and daily cycles can be used to determine when to enter and exit the markets, as well as to confirm tops and bottoms of the longer-term cycles. Most markets have several dominant cycles, each with a trough and a crest / affecting price activity / anyone of which can be isolated and measured. The length of the cycle is usually measured from trough-to-trough (low-to-low).