This is an excerpt from the forthcoming Liberated Stock Trader Book & Training Course : to be notified of release please register free as a member.
Over the past 200 years much has been written about cycles some of it very useful and some of it not so applicable to trading success. Cycles are evident in nature in the form of the earth’s rotation (days) earth rotation around the Sun (years), the moons rotation around the earth (tides), the seasons, animal migration and solar activity. Some traders believe natural cycles have an effect on the market. Is some ways they do, for example Weather cycles can have an effect on crop output which can affect commodity prices, which in turn affect the stock price of a company dependent on the commodity. However are there other cycles which can be measures for the more general stock market activity?
The effect of cycles on the economy, marketplace and business is clear; in this section we will take a look into the theory of cycles and look at how we can apply them to improve our understanding of market fluctuations and major moves. This will in turn enable us to make better trading decisions.
The most famous cycles are the Kondratieff Wave, Kuznets Cycle, Kuznets Cycle, Business Cycle, Presidential Cycle Seasonal Cycle and Daily Cycles. There are even intraday cycles.
The Kondratieff Wave
The Kondratieff wave measures between 46 and 60 years with a periodicity of 54 years. Based on Wholesale Prices in the US in the 1800’s, this phenomenon has been mapped from the 1800’s through to today. The last trough was 1940, and the prediction for a trough in 2000 seemed to be correct. However to see if this cycle theory proves correct again, we will have to wait another 40 to 50 years. How actionable this data is, is another question. Normally using statistical data a trend / theory is proven after 12 to 16 data points which we certainly do not have here. Also this theory is quite controversial in the annals of economists. Is it a tradeable cycle, well not really.
The Kuznets & Juglar Cycles
The Kuznets Cycle named after Simon Kuznets lasts 18.3 years, and here you can see it plotted onto the Dow Jones Industrial Average starting in 1934.
The Kuznets cycle seems to work reasonably well, marking the low point of the in the 1930’s depression, the start of the price surge in the 1950’s, the market crash of 1987 and the consequent establishment of the roaring bull market that lasted until 2000, however its timing seems to be slightly off in 2008, as it predicted a new phase from 2006 onwards. However all in all it is a very interesting element of Cycle analysis.
Clement Juglar was one of the first to develop an economic theory of business cycles; the Juglar cycle is approximately half of the 18.3 year cycle at 9.2, fluctuating between 7 and 11 years. This highlights the concept of nominality meaning each larger wave detected seems to be twice the size of the next smaller wave. The Juglar cycle is of a similar wavelength to the 10 year “stock market cycle”.
The article in the book goes on to discuss the decennial cycle, the business or Kitchin cycle, the Seasonal cycle and even the daily cycle. It has original research and actionable tradable insights.
This is an excerpt from the Liberated Stock Trader Book & Training Course
Other Chapters of the Liberated Stock Trader Book are listed below
This chapter sets the stage for the two key areas of stock market technical analysis and the fundamental analysis of companies including macro and micro economics
This chapter looks at what REALLY makes the markets move, what causes boom and bust cycles and how to spot them.
What are stock market cycles and the cycles of business and economies. Important information that you need to appreciate as part of your core analysis.
Next we move into fundamental analysis and the financial fitness of a company. All the major indicators and measures are covered.
Stock screening means using criteria to short list the kind of stock that you want to purchase. A vital part of any stock market training
Once you know the business climate, the state of the economy and you have shortlisted the stocks you want to buy. The next thing to do is the technical analysis. Even if the company looks great on paper, if the stock price is plummeting you do not want to buy it until it has bottomed out. This is called catching a falling knife. This is what chart patterns and technical analysis helps with.
Here we get into the art of drawing on charts to help you visualize the Supply and Demand on the stock, the direction of the trend and estimate how long the trend will last. Vital for you to establish buy and sell signals.
Which indicators should you use, there are literally hundreds of stock chart indicators. Each have a specific use case and application, which should you use?
Volume is a vital indicator along with price. Both of these you need to understand in granular detail, you will learn everything you need to know.
Moving to advanced technical analysis we cover indicators such as parabolic SAR and point & figure charts.
How are the market participants feeling? Positive, Negative or indifferent. Consider that 90% of people fail to beat the average market returns, sentiment indicators can be a great contrary indicator. Lean how to use them to your advantage.
Understanding how you want to invest, how much time you have and your time horizon. These questions all help you to understand what type of investor you want to be, this then enables you to select the right strategy for you. Then we move on to building your stock investing system, a critical element to your plan.