Cycle Theory Explained: Master Market Trends & Price Cycles

1 Basic Overview of Cycle Theory
2 Types of Cycles and Their Periods in Cycle Theory
3 Practical Tips for Using Cycle Theory
4 Cautions and Risk Management
5 Conclusion | Master Cycle Theory
6 References

Basic Overview of Cycle Theory

How Cycle Theory Works

Cycle theory is a technical analysis method based on the idea that market price movements repeat in specific cycles. These cycles are believed to occur across various timeframes, from a few hours to several years. Cycle theory can help predict future price movements from past price data.

History of Cycle Theory

The origins of cycle theory are ancient, dating back to the research of 19th-century economist William Stanley Jevons. Jevons argued that sunspot activity cycles influenced economic activity. Later, in the early 20th century, economist Edward R. Dewey (often confused with Edward R. Bernstein, but Dewey is more commonly associated with cycle research) studied stock price cyclicity, summarizing his findings in his book ‘The Cycles of Prosperity and Depression’.

Key Types of Cycle Theory

There are several types of cycle theory, each with distinct characteristics. Here are some of the prominent types:

Right Translation

Right translation is a pattern observed in strong uptrends. The upward period is longer before the price reaches its peak. This suggests that the market is maintaining an uptrend.

Left Translation

Left translation is a pattern observed in strong downtrends. The downward period is longer before the price reaches its peak. This suggests that the market is maintaining a downtrend.

Types of Cycles and Their Periods in Cycle Theory

Each Type and Its Characteristics

There are several types of cycles in cycle theory, each predicting market trends with different periods.

4-Hour Cycle

A 4-hour cycle refers to short-term market trends that occur every four hours. This is useful for day trading and capturing short-term market fluctuations.

Major Cycle

A major cycle is a medium-term market trend that occurs over several weeks to several months. Major cycles help in understanding medium-term market movements.

Primary Cycle

A primary cycle is a long-term market trend that occurs over several months to several years. Primary cycles are useful for grasping long-term market dynamics.

How to Count Cycles

Accurately counting cycles makes it easier to predict market movements. Here’s a detailed explanation of the method: To count cycle periods, past price data is used. Identify upward and downward cycles from historical price data and calculate their periods. Various technical indicators, such as moving averages and Bollinger Bands, can be used when calculating periods.

Fibonacci Sequence

The Fibonacci sequence is a series of numbers obtained by adding the two preceding numbers, like 1, 1, 2, 3, 5, 8, 13, 21… In cycle theory, the Fibonacci sequence is believed to be related to the length of market cycles. For example, Fibonacci ratios can be used to calculate price support and resistance levels.

Practical Tips for Using Cycle Theory

Analyze Cycles from Multiple Perspectives

It’s crucial to analyze not just a single cycle but multiple cycles simultaneously when using cycle theory. For instance, analyzing 4-hour, major, and primary cycles together can provide a more detailed understanding of market movements.

Combine Different Cycle Periods

Combining cycles of different periods allows for more accurate market predictions. For example, by combining short-term and long-term cycles, you can grasp both short-term market fluctuations and long-term trends simultaneously.

Combine with Other Technical Indicators

Cycle theory can achieve even greater accuracy when used in conjunction with other technical indicators. Combining it with indicators such as moving averages or RSI, for example, can provide a more precise understanding of market trends.

Cautions and Risk Management

Do Not Use in Isolation

It is recommended to use cycle theory in combination with other analytical methods, rather than in isolation. Cycle theory is just one tool for predicting market movements. Combining it with other analytical techniques allows for more reliable decision-making.

Importance of Risk Management

Risk management is crucial in trading. Proper risk management can minimize losses. While cycle theory is a tool for predicting market movements, predictions are not always correct. Therefore, it is essential to thoroughly implement risk management.

Create Multiple Scenarios

Always prepare multiple scenarios and be ready to adapt flexibly to changing situations. Markets are constantly evolving. Therefore, instead of sticking to a single scenario, it’s important to anticipate various possibilities.

Conclusion | Master Cycle Theory

Mastering cycle theory can enable you to identify market bottoms and tops, significantly improving your trading success rate. Cycle theory is a powerful tool for predicting market movements. However, it is not foolproof. By combining it with other analytical methods and thoroughly implementing risk management, you can effectively utilize cycle theory. We encourage you to apply these insights to your daily trading.