Written and copyright © 2009-2013 by Thomas N. Bulkowski. All rights reserved.
This article discusses how to use cycles to help time the entry and exit of trades, focusing on day trading.
Shown is a stock chart using a 10 day look back on the 5 minute scale, courtesy of bigcharts.com. I drew vertical blue lines to separate
the days more clearly for this presentation.
Pretend you are interested in buying the stock at a good price. Thus, you will be looking for cycle lows: common times when price makes a low. Knowing when price is
about to make a low gives you an edge. You can pull the trigger (buy) with more confidence. I show
red circles highlighting the locations when the stock made a low near the same time.
The first five circles bottom about 1.5 to 2 hours into the session (and you should be able to pick out the times on your intraday chart better than this one by zooming into
the individual day) and the two
circles on the right bottom later.
Trading Cycles: The Details
For end-of day traders like me, use the cycle information to help locate times when you should focus on the stock instead of sitting and
watching it all day. Cycles can help you determine when it will be a good time to buy (look for cycles among the valleys)
or to sell (cycles among the peaks). I have used this technique several times for entries and it works for both end-of-day traders and can also help day traders plan
when price is going the reverse, based on prior cycles.
Since each stock will show different cycle patterns, you will have to do your own analysis. Do not depend on every stock making a low 1.5 to 2 hours into the trading day.
This is just an example. The low you pick may not be the lowest low of the day, but one where you can get in at a good price.
When you look at your intraday chart as the
expected time of reversal nears, if the stock is trending higher then forget it. The cycle is broken and it will not work this day. But, if the stock is trending downward,
then it could reverse near the expected time. Look for underlying support or the stock to form a bottom, perhaps move horizontally for several price bars.
The 10-day chart will
tell you how typical reversals look, either V-shaped or more flat, wider looking (an Adam bottom versus an Eve bottom, if you know
what those are). If price looks to be turning near the cycle low time, then consider buying. The above chart, for example, has V-shaped bottoms at the common reversal times.
Trading Cycles: Shopping List
The following is a synopsis of what to look for when using cycles.
- Begin with the 10-day chart, if available.
- Find common times in which price bottoms.
- Look at the shape of price as it reverses from down to up. Is the reversal V-shaped or flat?
- Switch to the real-time chart (the chart you use to trade) and assume the reversal time is now.
- If price is trending upward, the cycle is broken, so look elsewhere for another trading opportunity.
- If price is dropping, look for underlying support that would cause price to turn.
- If price makes the same reversal pattern that you identified using the 10-day chart (that is, V-shaped or flat), then consider buying.
- Do not buy the stock just because the reversal time is now. Price could continue lower. Wait for it to reach underlying support and begin to turn.
-- Thomas Bulkowski
Trading Cycles: Other Examples
- Best buy days. Which day of the week is the best one to buy or sell?
- Best buy months. Can buying at the end of the worst performing month and selling at the best performing be profitable?
- Holidays. Does the market rise or fall before and after holidays? Answer: Fall.
- Market cap. Chart patterns in small cap stocks outperform.
- Seasonality. What are the best months to buy and sell stocks?
- 12 Month moving average. Use a moving average to time the market.
Written and copyright © 2009-2013 by Thomas N. Bulkowski. All rights reserved. Milli-Helen: A unit of beauty sufficient to launch one ship.