Previously we’ve been looking at the USDJPY chart… quickly before I continue my write up on Cycle Analysis I want to bring your attention to some relevant market action in the USDJPY as I speak…
Currently the Dollar-Yen is around 260 pips away from a potential ‘double bottom’ with a previous ‘major low’ (all time low) made back in April 1995, 15 years ago.
Double tops and bottoms are ‘support and resistance’ levels where high probability reversals occur… the interesting thing is that the further apart in time these major highs/lows are, the more significant the reversal.
This potential reversal in the USDJPY could be a very long term cycle coming to its end… and out of these long term cycles come the best trading opportunities as the new cycle begins.
I have so much to share with you about Cycle analysis, so we had better get stuck into it.
First I want to briefly look at the ‘cycle’ phenomenon that is found within every living and breathing thing; humans, plants and animals all grow and die with cycles. Time is manmade – so cycles are natures own rhythm of time.
An example is the human ‘life’ cycle.
The main cycle spans approximately 70-80 odd years, then there are smaller cycles within that larger one, like; childhood, young adulthood, parenthood, retirement years, etc. And within each of those are even smaller cycles, all with many rises and falls.
If you were to chart the significant up and down events over a person’s lifetime it would look very similar to the movements of financial market charts; the great ‘optimistic peaks’ would be things like high school graduation, marriage, children, career, retirement.
Whereas, the large ‘negative dips’ would be things like teenage dramas, divorce or relationship breakdowns, midlife crisis and major sickness.
The financial markets are really a ‘derivative’ of human emotions on mass and therefore reflect cycles of psychology. Business cycles are the same, periods of recession and recovery, growth and decline.
So what does this all mean?
And importantly where do we start?
In my last post I mentioned our aim was to find turning points in the market, as these are the start and end of trends. Knowing how to predict and confirm these market reversals steps up your trading results big time.
First you need to identify the larger, longer term cycles. This is because the longer term cycles are dominant to the smaller cycles within.
To find the longer term cycles we look at a monthly chart, (later we will look to the weekly and finally to the daily chart where our entry is found).
Going back to the USDJPY monthly chart where I already identified the major lows… I mentioned, there is an exact method in choosing the lows that I did.
Typically you can start by identifying all the major lows, moving on the monthly chart from the left to right. The important criteria is that between each of the major lows, there is no lower low.
So in a rising market there cannot be a low lower than the start price, and in a falling market there cannot be a lower price than the end price of the cycle.
In the image below, between point A and point B there is a lower low (black line low), so that is NOT a valid cycle.
In the next image you can see 2 full cycles (red lines) and at no time is there a lower price than the start for the rising market and the end for the falling market.
• Cycle 1 (point A to C) – B is not lower than A.
• Cycle 2 (point C to E) – D is not lower than E.
OK below is a Check List that summaries all we have gone over…
- Start on the Monthly chart (larger cycles dominate smaller cycles).
- Identify all significant/major ‘Lows’ in a market.
- Rising markets = lowest point must be cycle start.
- Falling markets = lowest point must be cycle finish.
Right signing off for now…
All the best