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Cycles are Perfect - But Misunderstood
The concept of Market Cycles evoke strong feelings
from anyone who has tried to deal with them. Some people
swear by them, but most swear at them. Their notorious
reputation comes from what we expect them to accomplish
for us.
The word Cycle comes from the Greek "Cyklos"
which means circle or ring. It represents a time period
and time only. However long it takes to complete whatever
it is manifesting is the length. Several repetitions
is the rhythm or frequency. The extremes it measures
is the amplitude. The relationship or starting point
of this cycle to another is the phase.
Cycles are Natures way of doing business. Everything
in our universe vibrates. Our senses and sensitive electronics
pick up these oscillations. This spirit energy combines
with other cycles to form all that we know. Therefore,
everything is the same but of different scales or octaves.
Cycles are perfect ... almost. There is just enough
of a deviation to cause change. If not, there would
be no growth or evolution and devolution. The causal
element of cycles is not being discussed here. That's
like talking about religion or politics. What is important
is their effect on us whether assumed or real.
Market cycles found on charts are first sensed or felt,
then identified and quantified. A big problem for us
is that they do not repeat every time to the Nth decimal
point, nor do they turn on a dime. A day is a day, but
how many are exactly 24-hours long sunrise to sunrise.
Night doesn't turn into day in a second nor does spring
immediately become summer on 6/21.
All markets are the sum total of the different groups
of people attuned to different cycles and should be
analyzed as to their various contributions. The same
natural laws of attraction and repulsion cause us to
act with compulsion to trade the way we do as individuals
and yet leave our mark on a chart as part of some group.
Just like trying to judge a book by its cover will not
help identify the finer details inside, neither will
analyzing a chart in its totality offer any insights
relating to specific internal future moments. When looking
at any chart (stock, commodity, etc.), the data available
determines the largest cycle either by appearance or
its effect. One consolation we get from Nature, is that
the bigger cycles will tell you where the smaller ones
must go and the smaller ones will tell you where the
larger ones are going.
We live in a multi-dimensional world. Our perspective
of the cycle or actually the effect it has on us is
not flat. Imagine a spinning bicycle wheel going around
and around. Walking in front of the wheel has not changed
the time required to make one revolution. Our view of
it has changed, now it is up and down. The same holds
true for some effect it might have on us. Tilting it
on an angle also changes the size or the appearance
of the wheel's top and bottom.
The data which makes up our cyclic composite on charts
or screens should be analyzed carefully. By the time
we see it, its purity has already been tampered with
through vendors, broadcasters, price reporters and other
human conditions. How accurate is measuring the depth
of bath water while standing in the bathtub? Exotic
filtering and over manipulating the data removes and
distorts the essence of what we're looking for in the
first place.
The love-hate relationship we have with cycles is based
on our assumptions. As convenient as we would like them
to be, our expectations are unrealistic. Nature and
her cycles are fine. Their effects can be counted on.
When there is human intervention and analysis of the
effects on people is being done with dollar oriented
motivations, the correct solution becomes difficult.
It seems ironic that the same understanding and respect
mankind has shown for Nature shows up in the markets
where people are quick to blame their losses on those
damn cycles that don't work right.
Reducing Commodity Trading Investment
Risk
Modern Portfolio Theory & Money Management
Modern Portfolio Theory: Several decades ago, the Nobel
Prize was awarded to the father of Modern Portfolio
Theory for developing concepts which showed the benefits
of diversification. The underlying theme of the research
is that diversifying an investment portfolio can materially
reduce risk, without decreasing expected returns proportionately.
On the other hand, there is a school of thought which
believes that investors should learn as much as they
can about a given market. There is a clear tradeoff
between 1. being an "expert" on a few markets
and 2. diversifying a portfolio into other markets to
improve risk and return characteristics. It is difficult
to track more than a few markets - but the benefits
of diversification should be examined. This is a personal
decision since it is important to be comfortable with
everything we do.
Quantifying the Benefits of Diversification: The following
table shows the expected reduction in volatility a portfolio
can achieve through diversification. It should be noted
that the chart makes some simplifying assumptions -
most importantly, that the additional markets are totally
unrelated to the original markets. Many assets are related
at least to some extent - due to inflation or currency
effects. Table in Print Copy.
Money Management and the Use of Stops: minimizing losses
is an important concept in money management, and indeed,
the accumulation of wealth. Many investors use stops
to limit their losses in the form of either:
- actual orders with a broker
- or a mental stop which the trader monitors
Although stops are a very effective money management
tool, investors should not blindly place stops for the
sake of using stops. For example, if the stop is positioned
too close to the current market price, the trader will
be whipsawed by the "noise" in the markets.
The magnitude of the stop should be a function of volatility,
the investor's time horizon, and the characteristics
of the trading system.
Expect The Unexpected when Trading
One of the most important things I have found out
about the markets is: Expect the unexpected. You will
be "setup" time and time again by the reverse
psychology of the markets. This is especially true when
daytrading the S&P 500, but surprises are also a
part of the other markets and time frames.
Today, is a good example of what I'm talking about.
I'm sure the typical trader was thinking down. The market
did make a rather sharp move down, but that was the
setup. It then turned around, whipsawed a bit and then
went up approximately $2,500 per contract. The reverse
psychology of the market had once again put the screws
to the common sense psychology of the average trader.
I have always disliked it when book writers would refer
to a good trader as being a kind of artist. Seemed to
me like mysticism was being given some credence. I still
don't believe in calling a good trader an artist. However,
I can see where having the ability to sense the psychology
of the typical trader, and doing or getting ready to
do the opposite, does approach an artistic rather hard
to explain ability.
My signals are more than adequate. I will continue
to develop my ability to sense the psychology of the
average trader looking for the setup. I believe a trader
is well on his or her way to success when most of the
unexpected moves become the expected. Surprise is very
much a part of the markets. Perhaps it's the primary
thing that allows markets to survive and pros to prosper.
A flexible mind that can change its market direction
mode of thinking, in a minute or two, is a very desirable
thing to have when daytrading the S&P 500. Something
I have to work on always.
reprint permission from Webtrading.com |
