What Are Cycle Indicators & How To Trade With Them

Cycle Indicators

The cycle indicators are a form of oscillating indicators that analyse market cycles. The market cycles are form of price movements.

What are Cycle indicators?

According to the theory, financial markets move in cycles from bearish to bullish or back again to bearish. These market cycles often repeat, and in this way, they indicate price patterns.

The theory also defines that the market moves in small cycles within the larger ones on shorter timeframes. Similarly, on longer timeframes, the larger cycles contain smaller cycles. This assumption makes cycle indicators more worthy because there is no way that a trader can find price movements in these cycles.

Types of Cycle indicators

Following are some of the commonly used cycle indicators:

1. CCI

The CCI or Commodity Channel Index is a type of momentum oscillator. It indicates overbought and oversold conditions. By doing this, it measures the overall direction of the current trend.

The CCI combines the average of the current price and the previous price for its calculations. When the CCI is above zero, the price is above the previous average, and when the CCI is below zero, the price is below its previous average.

The CCI oscillates between -100 and +100. When the price is above or near +100, it’s an indication of an uptrend. Contrarily, when the price is below -100, it’s a sign of a downtrend.

As the CCI is a momentum-based oscillator, sometimes it can give false signals. So, traders must use it in conjunction with other indicators.

CCI on a chart
CCI on a chart

2. Schaff Trend Cycle

The STC or Schaff trend cycle is another kind of momentum oscillator. It formulates that the market always moves in a cyclic pattern regardless of the time.

The STC indicator calculates using the EMA (exponential moving average) and adds a layer of a cycle by using a specific period to measure the trend’s direction. A trader can select his/her own period, depending on the strategy.

One of the biggest advantages of STC is that it works on all timeframes across all financial markets. However, seem believe that it can work well on the forex markets, as the forex market is more cyclic than any other financial market.

The STC indicator works similarly to the MACD, but as the indicator adds a cycle, it is more accurate than MACD.

STC on a chart
STC on a chart

3. Detrended Price Oscillator

The detrended price oscillator or DPO tries to measure the length of price cycles from peak to peak and trough to trough.

Unlike its counterparts MACD or the RSI is not really a momentum indicator; rather, it indicates price highs and lows according to market cycles. It does this by comparing SMA with the previous prices with the period ranging from 20 to 30.

By looking at the last highs and lows, traders need to draw vertical lines to form an alignment with them. If highs are older than 1.5 months, the indicator can point the next peak within 1.5 months period. Conversely, if lows are 1.5 months apart, the DPO can highlight the next trough within this period.

One thing traders need to remember that the DPO is a trend indicator; it forms peaks and troughs to mention price reversals. So, when traders locate the peaks, they may look to take sell positions, as another peak may occur in the next 1.5 months. The same situation goes for the troughs. If they occur, traders may consider to take buy positions.

DPO on a chart
DPO on a chart

Cycle Indicators conclusion

There is no doubt that markets move in cycles. The longer cycles or shorter cycles are part of many cycles. When applying a trading strategy, traders may consider these indicators as part of their trading methodology.