Stock market cycles are absolutely critical to understand because they tell you when to enter and when to exit the market.
Actually, when you think about it … isn’t that what trading is all about? When to get in and when to get out. All the other complicated theories, Forex indicators, E-mini price patterns aside, it really all just comes down to those to things:
- When do I buy?
- When do I sell?
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Welcome to this video on Stock Market cycles. Barry Burns here with Top Dog Trading. Today we are going to make reference to a quote from W. D. Gann. He talked about markets being about the confluence of time and price. There’s a lot to be said about that.
For example if you look at a chart, it’s a 2 dimensional object. There’s only 2 dimensions, we’ve got price over here on the y axis and then at the bottom axis, of course the x axis we have time. What’s interesting is that a lot of people give a lot of emphasis on the price axis, the y axis. So these are for indicators, these are for support resistance, these are for candle stick patterns, price patterns.
STOCK MARKET CYCLES
The problem is that not as many people talk about the time axis. And it’s really a shame because it’s just as important. It’s 50% of the information on the 2 dimensional object we call a chart. And yet while there definitely is information out there about trading cycles, it tends to be very complex, very sophisticated and pretty much ignored by the majority of traders. So what happens when you ignore the time axis?
Here’s how a lot of people would experience it in practical ways in their trading. They look at this as an uptrend here and say that looks pretty good. Let’s look for the retrace. And they would see this as a retrace down and say, ‘Good, I am going to buy that.’ And you know there’s something to warrant that. For example one of the things here quite clearly is that we’ve got some resistance over here that becomes support aligned stock market cycles. And so you could draw that across as a horizontal line and say we have resistance. Resistance we got above it and now we are coming down to support to bounce of off that.
THE CONFLUENCE OF TIME AND PRICE
Okay so there is a reasonableness to taking that position, and so then you go long there and market goes up and then oh my gosh comes back down and it takes out this low. Guess what? That was not the right time to enter this market. That’s what happens in real life from a practical point of view is people get stopped out. Because they got in at this time instead of this time. And that makes a big difference.
Day traders and swing traders of stocks, Forex and futures end up getting stopped out of the market and that leads to a psychological challenge where you get kind of skittish. You’re saying gosh, it seems like somebody is trading against me, somebody is watching my trades, and my broker or somebody is just watching my trades and taking the opposite sides of my trade.
BUYING THE LOWEST LOW AND SELLING THE HIGHEST HIGH
The market goes forward, then it finally goes up. Okay, so the right time to enter this market was this time right here. That’s where you get your lowest low before the market resumes its uptrend. So one of the ways that people use to measure stock market cycles from the most, it would seem like obvious ways, and some trading platforms actually have this type of tool as a cycle tool, is to look in history. And ask yourself what would have been the cycle lengths in the past.
We could go from this low to this low, by the way in traditional cycle analysis, cycles are always measured from low to low. Whether it’s an uptrend or a downtrend. I personally don’t subscribe to that but that’s traditional cycle analysis.
This cycle low to that cycle low is 22 bars. Then if we go from that cycle low to that cycle low, its 26 bars. Pretty close, pretty close. Not too bad. And then if we go to the next cycle low, now we are at 28 bars. So we have 28, a 26, a 22. They are getting longer, aren’t they? So the difference between 22 and 26 and 28 and that seems like a lot, but between 22 and 26, is a fairly decent percentage. Could be kind of hard to time that.
THE MARKETS ARE NOT TAME
In fact if we looked at this cycle low, guess what, we might think using this technique of looking for cycles to be about the same, you might think that is the cycle low because it’s within one bar of the previous cycle. And so that would be very deceiving. And the reason that this happens is that cycles expand and contract. They are not consistent. The markets are not that neat and tidy, they are very challenging. They are not like a tamed purse puppy. Markets are more like a wild tiger that even if you thinks it’s your friend for a while, it will actually never be domesticated.
So stock market cycles are like that and that’s one of the things that make cycles so challenging. It’s really one of the harder things in technical analysis to do. And there’s actually a lot of very impressive work that’s done on it mathematically. I don’t personally subscribe to most of it. What I have found is that the best way to measure cycles, actually you have to do it in real time. Past history, really in my opinion has nothing to do with what cycles are going to come up in the future.
I don’t have time to go into all of it because I try to keep all these videos under 10 minutes. But basically we are in real time, looking for momentum shifts. So we are looking for strength to go up, strength, strength, strength, then we are looking for a weakness. For the momentum to shift here. And momentum is velocity times mass. So that’s the speed of market orders and volume of the market.
And once, so we get strength, as soon as we get weakness, we look for a stock market cycles high there. And then the same thing, when it comes down we look for strength coming down until it gets weak and then we look for shift to go back up. Now this assumes several different things and it can’t be taken in isolation. We use cycle analysis with other tools. And this is just one way that cycles are shown. It’s not the only way. In other words, sometimes we actually, at end of the cycle high or cycle low with spike volume bars and that’s a very well-known phenomenon.
As opposed to the market getting weaker, it actually shows exhaustion. So it’s the exact opposite. It’s a big thrust that’s unsustainable. But it’s either normally one or the other. Those are the ones that are tradeable. So the market puts in cycle highs and cycle lows that don’t provide high probability trades. We are not trying to be right and find every cycle high and cycle low.
Trading what’s going to happen from here, that’s challenging. And so when we actually take the trades as opposed to just analyzing history, that’s where we look for momentum shifts, in other words momentum is going down and then it gets weak, and that’s when we look forward to shift back up. So you do this with the other energies in the market.
So price is much easier. Price is simply using the support resistance levels that are the most common things. So floor trader pivots, Fibonacci levels. You can use moving averages, I call that dynamic support resistance, if you’re day trading, the previous day’s high, low and close are very important. For long term trading 52 week highs and lows. And very important are major major previous swing highs and lows. So those would be the primary support and resistance levels.
HOW DO YOU TIME YOUR ENTRIES AND EXITS?
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