MTA Educational Web Series Using Cycles in trading

1. MTA Educational Web SeriesUsing Cycles in trading By: Matthew Caruso, CMT

2. Matthew Caruso, CMT • Matthew Caruso is a Senior Pro-Equity trader at National Bank Financial (NBF) as well as an active independent futures trader. Matthew is a Chartered Market Technician and serves as President as well Montreal Regional Director  for the Canadian Society of Technical Analysts (CSTA). Matthew is also an adjunct professor at Concordia University’s John Molson School of Business where he teaches the course “How to build a profitable trading system (using technical analysis)”. Matthew has written several articles which have appeared in stocks & Commodities magazine as well as the MTA newsletter

3. What are cycles? • Cycles are recurring patterns in time • Many real world phenomena move in predictable cycles • In the market, a cycle is an approximate length between important market bottoms • No definite explanation as to cause

4. How can cycles help your trading? • Selection of TA tools – what technique should I use? What length should I study? • Prevents over trading • Determines time frame for decision making

5. Cycle Characteristics • Retracement (Chart 1) • Cycles typically retrace by one to two thirds after their peak (uptrend) or bottom (downtrend) • Translation (Chart 1) • In an uptrend (larger cycle is up), cycle tops are made in the second half of the cycle • In a downtrend (larger cycle is down), cycle tops are made in the first half of the cycle • Fractals (Charts 2 & 5) • Cycles work the same on all time frames • Larger cycles impact smaller cycles

6. Chart 1

7. Chart 2 – Daily Cycle

8. Chart 3 - Downtrend

9. Chart 4 - Uptrend

10. Chart 5 – Larger Fractal

11. Cycles Pros • Risk vs. reward (chart 6 & 7) • Prevents over trading • Prevent excessive pyramiding at wrong time • Forces you to wait for the market and anticipate • Provides a rationale for selection of indicators as well as lengths of indicators • Provides a continual understanding and awareness of trend (right & left translation a result of larger cycles. Larger Cycle = trend) • Knowledge of the direction of the larger cycle is gives insight of the current trading trend – chart 5

12. Chart 6 – Risk vs. reward

13. Chart 7 – Risk vs. reward

14. Cycles Pros • Risk vs. reward (chart 6 & 7) • Prevents over trading • Prevent excessive pyramiding at wrong time • Forces you to wait for the market and anticipate • Provides a continual understanding and awareness of trend (right & left translation a result of larger cycles. Larger Cycle = trend) • Knowledge of the direction of the larger cycle gives insight of the current trading trend (chart 5) • Provides a rationale for selection of indicators as well as lengths of indicators (Slide 15)

15. How cycles determine your TA tools • Oscillators used with cycles should be ½ or ¼ the length of the cycles being traded (Charts 8 & 9) • Oscillators should be used only to enter a market, not to exit • All oscillators give very similar results, use what you are most comfortable with. • I prefer the stochastic or %r

16. Chart 8 – Tools selection

17. Chart 9 – Tools selection

18. Cycles Cons • Not perfectly consistent • Very difficult to automate • Very difficult to mechanically back test • Sometimes downright confusing • Difficult to apply on short timeframes

19. Recommended Reading • CMT Program • “The power of Oscillator/Cycle Combinations” by Walter Bressert*** • “The mysterious forces that trigger events” by Edward Dewey • “The profit magic of stock market transaction timing” by J.M. Hurst • All books by Larry Williams (not cycle related)

20. Thank you • Questions? • matt.caruso@analyzingmarkets.com