Introduction to Cycle Theory

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Origin of Cycle Theory

Cycle theory in investing refers to the idea that financial markets, economies, and certain assets tend to go through cycles of expansion and contraction. These cycles can be driven by a variety of factors, including changes in monetary policy, economic conditions, and mainly investor sentiment. According to cycle theory, market trends and asset prices tend to move in cycles that can last for days, weeks, months or even years.

The basics

The goal of cycle analysis is to determine when a cycle low will occur and to pinpoint the best entry into the market. Very important to know is that cycles are based on time rather than price level. So, if you ever heard a cycle analist say “cycles say that the low will be around 1800” —> BS ;-) .

Some investors wait for confirmation of the cycle low using certain parameters, while others may choose to enter the market earlier with a smaller position and then add to the position upon confirmation. Next segments will talk about cycle lengths, important terms and at the end you find the whole theory applied to a chart.

Length of cycles

Different sectors may have different cycle lengths for different time frames. For instance, you may find that the daily cycles of gold tends to have shorter daily cycles of 30-35 days while an instrument like crude oil tends to have 50-60 days and Bitcoin tends to have 60 day cycles.

It's important to note that cycles can be identified at various time frames in financial markets. Important to note is that these cycles are interconnected, meaning that a series of daily cycles make up an intermediate cycle (weekly), and multiple intermediate cycles make up a yearly cycle. The number of daily cycles that compose an intermediate cycle can vary depending on the market, but it is usually between three and five.

Important terms to understand

Daily Cycle Low/High (DCL/DCH) = cycle low/high on daily time frame

Intermediate Cycle Low/High (ICL/ICH) = cycle low/high on weekly time frame

Right Translated= when the DCH occurs in the second half of the daily cycle. An example here is in a 30day cycle, we speak of a right translated cycle when the DCH occurs on day 16-27.

Left Translated= when the DCH occurs in the first half of the daily cycle. An example here is in a 30day cycle, we speak of a left translated cycle when the DCH occurs on day 3-14.

Failed Cycle = when the current daily cycle goes below the previous daily cycle low. This is an early warning signal the trend is breaking and we’ll reverse to the other side

Example

As you can see these are 2 Right Translated (RT) cycles, because both DCH’s happen in the second half of the Daily Cycle. Afterwards we see a swift trend change and a breakdown below the previous cycle low. This means we have a failed cycle and is an immediate warning signal the uptrend is broken.

Confirmation of lows

Here we need to tick 4 boxes to be absolutely sure:

1. swing low (a move that closes above the candle that marks the low)

2. close above MA10 (after first closing below it)

3. A decisive break above trend line

4. MA10 clearly curling up, supporting the price.

Thank you for your attention!

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