Cycles and Technicals: A Profitable Pair; A Complete Trading Plan Should Have at Least Three Levels: General Market Assessment, Trading Entry Timing and Post-Trade Position Management. Here, We Look at Timing and Post-Trade Management Strategies for a Larger Methodology That Trades around Macro-Level Shifts in Major Cycles

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A good timing mechanism can provide an extra edge for a trader's technical analysis toolkit. One solid approach is cycle analysis. This can be useful for timing short-term counter trends from one to several days that occur with regularity, and for pinpointing the beginning of longer-term trends.

Indeed, cycles are flexible. With some adjustment, we can expand on a core concept to develop both a day-trading strategy and an options straddle strategy for short- and long-term positions. See "Market timing with cyclical analysis," September 2005.

The theory behind using cycles for market timing is nothing new. Several trading methodologies have employed that type of analysis. Some of them have been based on regular fundamental cycles such as seasonal supply and demand, underlying business cycles or even phases of the moon. Others, such as Market Profile, which aims to identify development of price patterns in distinct phases, and the Elliott Wave Principle, which looks for a series of up and down swings as part of a longer term price move, are based on cycles of variable and indeterminate length.

Another approach is to combine many different cycles. On any given day, two or more of those cycles could generate a buy or sell signal, but often there is only one of them involved. Although it may appear that having multiple cycles coincide to generate a trade would portend a bigger price swing, empirical evidence does not suggest that any such correlation exists.

BEYOND THE FORECAST

Having a forecasting model does not create a complete trading approach. Bad trading habits and unsound money management can still spell certain doom, even when a trader is equipped with the most in-depth analysis. Backtesting and paper trading are prudent components in developing a …