The cycle indicators are a form of oscillating indicators that analyse market cycles. The market cycles are form of price movements. Cycle indicators is a term to indicate repeating patterns of market movement, specific to recurrent events, such as seasons, elections, etc. Many markets have a tendency to move in cyclical patterns. Cycle indicators determine the timing of a particular market patterns.
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.
A cycle in the market is determined by a series of repeating patterns. These patterns are, as a rule, dedicated to certain market events, such as seasons, simple day counts, event-to-event sequence, market theories and formulas and so on.
Types of Cycle indicators
According to cycle theory, stock markets have a tendency to move in cyclical patterns from periods of bullishness to periods of bearishness and back to periods of bullishness. These cycles are repeated with a regularity that allows them to be used to anticipate price changes at key cyclical intervals. However, shorter cycles are present in shorter time frames with smaller cycles operating within larger cycles. It is this phenomenon that makes cycle analysis difficult as at any moment a shorter cycle may be moving upward while the larger cycle is moving downward.
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.
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.
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.
Cycle Indicators conclusion
There are many forex traders believe that the markets have a cycle. This cycle is the result of human behavior in the markets. As a result of this innate human behavior, trends seem to repeat in the market. If a trader can chart these trends and predict future movements, they can gain an edge in their trading. 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.
Once identified and understood, cycles can add significant value to the technical analysis toolbox. However, they are not perfect. Some will miss, some will disappear and some will provide a direct hit. This is why it is important to use cycles in conjunction with other aspects of technical analysis. Trend establishes direction, oscillators define momentum and cycles anticipate turning points. Look for confirmation with support or resistance on the price chart or a turn in a key momentum oscillator. It can also help to combine cycles.
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