What is Market Cycle?

Written by ForexCycle.com

A cycle is simply a regularly occurring sequence of events. The sun rising every morning and setting in the evening is a cycle. The four seasons are one cycle. In forex market, a cycle is loosely defined as price movement of a market from a local bottom to a local top and back again.

Cycles, just like price trends, can be long, short or intermediate in length. A specific market may have a 20 day, 52 week and 5 year cycle, all acting together to describe price activity. By adding the cycles together, the actual price activity can be forecast.

Market cycle analysis attempts to find recurring major and minor peaks and troughs in price movement for better trade timing. Here are some examples of forex market cycles.

• The 30-day cycles in the EURUSD daily chart
  

• The 25-week cycles in the AUDUSD weekly chart
  

• The 200-hour cycles in the AUDUSD 8H chart

How to use MetaTrader to find market cycle

Price movement is a series of tops and bottoms, the price runs from one bottom/top to another is called a cycle and each cycle has the similar length. MetaTrader has an excellent tool to help you identify the market cycles.

Now we use EURUSD 4 hours chart to explain how to find the market cycle bottom.

• Step 1 : Run MetaTrader, look at the EURUSD chart and mark up the important bottoms.
  

• Step 2 : Press the “cycle line” button on the tool bar to draw a series of vertical line. Make sure every vertical line is near to the import bottoms.
  

Sources :

1. ForexCycle.com : What is Market Cycle?
2. Blog ForexCycle.com : How to use MetaTrader to find market cycle

Relative Strength Index – Best Oscillator for Market

Written by ForexCycle.com

Relative Strength Index (RSI), one of the most popular financial technical analysis oscillators is best adapted to work in markets, which is range-bound. Developed in 1978 by J.Welles Wilder its popularity is mainly due to its easy interpretation.

RSI helps you measures the strength of all upward movement against the strength of all downward movement in a specific period. Even though the common parameter for RSI period is 14, because, Wilder recommended a smoothing period of 14; users can however choose the period of their choice.

The RSI compares the upward price movement to downward price movement over the specified timeframe, and displays the result as a momentum line oscillating between 0 and 100.


Moreover, relative strength index or RSI can range from zero to hundred, which is a result displayed as a momentum line oscillation. If someone tells you that the RSI is 50, it means that the market is demonstrating an equal strength of upward and downward force. Similarly if RSI is greater than 50 that denotes a strong upward force than the downward force; while, less than 50 denotes a stronger downward force in comparison to the upward force.

To make the process simpler, here is a mathematical representation of RSI:

RSI = 100 - [100/ (1+RS)]
Relative Strength = Average of 'n' day's up closes / Average of 'n' day's down closes

A number of applications use relative strength index like, for detecting the overbought and oversold condition of the market and spot divergence; where, it has been successfully implemented. Just like as considered by Wilder, if RSI is less than 30, the market/security is deemed oversold, an investor should consider buying; similarly, if RSI is greater than 70, the market/security is deemed to be overbought, and an investor should consider selling.


So also is the application of RSI in Spot divergence. Divergences are a universal form of interpretation for the Relative Strength Index. When the relative strength index starts diverging and moving in a different direction along with the value near support/resistance level, it indicates the dwindling of the market trend. This is said to have accomplished a "failure swing" and therefore is confirmed the coming reversal.


The use of relative strength index is the most appropriate as a valuable complement to other stock-picking tools. It is imperative that a trader should understand the technicalities of using RSI. He/She should also be aware that big surges and drops in the asset price would affect the RSI by creating false buy or sell signals.

Moreover, there is a strong connection between relative strength index and momentum. If the specified momentum period is greater than one, then this period definitely becomes the model period for comparing closes to resolve gains and losses.

Supposedly, if seven is the momentum period, then you may compare the current close to the close seven periods ago. In case the relative strength index using a momentum period is greater than one, then you can refer to it as Relative Momentum Index (RMI).


Sources :

1. ForexCycle.com : Relative Strength Index – Your Best Oscillator for Market

Determine Market Trends with MACD

Written by ForexCycle.com

MACD Divergence or Moving Average Convergence/Divergence is a useful indicator for spotting major changes in market trend, indicate trend direction and for giving hints of a possible market reversal. It is one of the strongest signals generated by technical indicators such as crossovers and divergence from price on a daily chart.

This MACD method, developed by Gerald Appel also referred to as a trending indicator, indicates the up-trend or a downtrend of a particular stock. It is essential that you first assess the track of the long-term trend, before you invest in any market.

The MACD method as used by Gerald Appel makes applicable a 26-day and 12-day EMA based on the daily close, and a 9-day EMA for the signal line. If you are a bit confused, let me acquaint you with the simplest version of the MACD indicator. It is composed of two lines: the MACD line and a signal line.

While the MACD line is the difference between two exponential moving averages (EMAs), the signal line is the EMA of the MACD line itself. You can find the signal line plotted on top of the MACD, which indicates buy or sell opportunities in the market. The two main sets of signals generated by the MACD are crossovers and divergence.

• Crossovers : One of the two MACD crossovers is Signal Line Crossovers, which refers to when MACD crosses above or below the signal line. When the MACD rises above the signal line, it is buying time, and when the MACD goes below the signal, it is selling time according to MACD trading rule. It is recommended that the Signal Line Crossovers be used in combination with other technical analysis tools to avoid many false signals.

• On the other hand, when MACD crosses above or below the zero line, it is called Zero Line Crossovers. When you need to buy/sell stocks when the MACD crosses above/below the zero line, this zero line helps in producing a signal.

• Divergence : When the MACD makes a higher low but the market makes a lower low, then it is called positive divergence. On the other hand, when the MACD makes a lower high while the market makes a higher high, it is known as negative divergence. While the former situation gives us a hint of a possible reversal to the upside, the latter gives us a hint of a possible reversal to the downside.

However, market experts believe that the best way to use MACD would be an amalgamation of signals to verify one another. There are also recommendations of the addition of fast MACD lines to enhance the signals generated and to provide early warning of trend changes. It is also noteworthy that MACD can provide premonition of important market turns through divergence.

The MACD also has its own set of weaknesses. Just as being a trend indicator, MACD sometimes fails to capture the move when the trend is short lived, even though it reliable enough to capture the majority of the move, when a substantial trend develops.


Sources :

1. ForexCycle.com : Determine Market Trends with MACD

Support and Resistance Levels

Written by ForexCycle.com

Support and resistance are respective price levels at which prices stop going down or up. Support levels indicate the price at which most traders believe that prices will move higher. Resistance levels indicate the place where the most of traders feel prices will move lower.

Trading ranges are formed by support and resistance levels. A trading range can play an important role in determining support and resistance as turning points or as continuation patterns. In a trading range, price fluctuates in a narrow band with no clear trend. Buyers take long positions when the prices move to the support level, and sellers go short at the resistance level.

Support and resistance does not always hold. A break below support level signals that the sellers have won out over the buyers, and bearish movement can be seen to follow. On the other side, a break above resistance level indicates that the bulls have won out over the bears, and the following uptrend can bring market price to a new high.

Here is an example in the forex market. Resistance for the EURUSD is located at 1.4975. The market bounces around below this level and forms a sideways consolidation for several weeks until both buyers and sellers think that fair rate of EURUSD is higher than 1.4975. The market breaks out of its trading range on 26-Feb-2008 and moves higher until most of the traders agree that fair rate is 1.5700.


Some times we can see the price pulls back to the previous resistance level, and then rally again. Why does such interesting thing happen? If the market trades back down to the previous resistance, buyers who missed the earlier breakout will see their second chance to go long. So the market rebounds up off this level which has now turned to support.


Sources :

1. ForexCycle.com : Support and Resistance Levels

The Basics of Swing Trading

Written by ForexCycle.com

Swing trading is a trade method in the gray area between trend following and day trading. A swing trader holds a stock for a small period of time and then will trade the stock when it's in it intra-week or intra-month oscillation. A experience swing trader will generally choose a large-cap stock because of its broadly defined high and low extremes. The trader will ride the stock wave in one direction for a couple of weeks, only to switch to the opposite side of the trade when their particular stock changes direction. A swing trader is best in position to do this when that market is more on the stable side versus it being a bear or bull market. This is because those markets' momentum generally carry stocks in one direction only (and for a long period of time).

The success in swing trading is to be able to identify what type of market is currently being experienced. One of the best ways of doing this is looking at historical data of what was indicative of different markets in the past, particular prime swing markets. If a market is identified as prime for swing trading, but later turns out to be a bear or bull market, a swing trader can find that there are the same up and down oscillations than those that occur in a more stable market. This would ensure that best strategy would be to trade on a long-term directional trend instead of the quicker trends that many of the most experienced swing traders are noted for.

Unlike many stock traders, swing traders are not looking to make it big with one particular trade, but are more concerned with hitting its baseline and confirm its direction. At the profiting level, a swing trader will want to exit the trade as close to the upper or lower channel line without being too close, which can cause a loss in opportunity. In a market where a stock is showing a strong directional trend a swing trader will usually wait for the channel line to be reached before selling, thus when a stock is showing a weaker directional trend, the trader will usually sell before the before it hits the channel line in the event the direction changes and the line does not hit on that particular swing.

Swing trading is a great method for beginning traders, while offering a profit potential to advanced traders. A great trader will be able to know when the stock is ripe and what momentum their particular stock has gained before making a decision. Trend following plays a very important role in swing trading as well knowledge of the physics of the stock market. Like the physics of ocean waves, swings can be unpredictable but when a large wave comes rushing at the shore, then its prime time for swing trading, but remember that swing trading is never as predictable as the swinging of a clock pendulum.


Sources :

1. ForexCycle.com : The Basics of Swing Trading

The Trading Secrets of Fibonacci and the Golden Ratio

Written by ForexCycle.com

We all are familiar with the fact that successful traders use Fibonacci and the Golden ratio. Before, we all get ready to try our luck, it is imperative that we know and understand what they are. While Fibonacci numbers and sequence was first known to appear in a book (Liber Abaci ) written by a famous 13th century mathematician Leonardo Fibonacci da Pisa in 1202 as a solution to a problem. The question quoted "How many pairs of rabbits can be generated from a single pair, if each month each mature pair brings forth a new pair, which, from the second month, becomes productive?"

The Fibonacci numbers were the first introduced in the European countries, which was still using Roman numerals with the decimal system or the Hindu-Arabic numerals as presently used. The Fibonacci sequence: 1,1,2,3,5,8,13,21,34 and so on to infinity, is made by adding the two previous numbers in the sequence, to come up with the next number.

Similarly, Golden ratio is also connected to Fibonacci, as it was recorded that just after the first few numbers in the Fibonacci sequence, the ratio of any number to the next higher number is approximately .618, and the lower number is 1.618. These two numbers are known as the Golden ratio.

Fibonacci numbers like much of its use in spheres of art, music, biology and architecture; finds an ardent follower in traders, who uses Fibonacci numbers to set stop loss orders. Two of the most important Fibonacci percentage retracement levels in trading are 38.2% and 62.8%. While other important retracement percentages include 75%, 50% and 33%. For instance, if a price trend initiates at zero and peaks at 100, to later decline to 50, it would be considered as 50% retracement. Similarly, the same levels can be applied to a market that is in a downward move and then suddenly experiences an upward correction.

There is a great connection between Fibonacci numbers and trading, as it defines stop loss level. A trader can set a stop loss placement just below or above the zone, in case three Fibonacci price levels come together in a relatively tight zone. Moreover, a Fibonacci number can help define stops in eventualities like if the support zone is violated and the price trades below that zone; or a trader trades against a support zone. In such cases, the cause for the trade is annulled and the position closed.

However, using Fibonacci retracements takes away the excitement out of trading and gives a pre-defined exit point. Moreover, Fibonacci numbers gives position sizes depending on the risk you are prepared to take per trade; and also defines profit objectives to bank partial profits or constrict stop loss level, once a pattern is completed against a Fibonacci price zone.

One of the immense advantages of Fibonacci numbers and the Golden ratio in trading is the fact that while taking the excitement out of trading, you can define not only stop losses to exit a market, but also set profit objectives as well.


Sources :

1. ForexCycle.com : The Trading Secrets of Fibonacci and the Golden Ratio