Trading Systems and Methods, + Website, 5th Edition

CHAPTER 11

Cycle Analysis

The cycle is another basic element of price movement, along with the trend and seasonality, but as a mathematical problem it can be more difficult to evaluate and is often avoided. But there are many different types of cycles, from agricultural to presidential election, and many of them are simple to evaluate and can improve trading.

Cycles come in many forms—seasonality, production startup and shutdown, inventory or stocks, behavioral, and even astronomical. Seasonality is a special case of a calendar or annual cycle. Seasonality was covered in the previous chapter, and its special features are not considered here. Some of the cycles are clearly periodic, having regular intervals between peaks and valleys; others are more uniform in their amplitude or height but irregular in period. The most definitive and regular cycle remains the seasonal, which is determined by periodic physical phenomena, the changing of the year.

This chapter will discuss the major commodity and financial cycles that most likely result from business decisions, government programs, and long-term market characteristics and phenomena. Short-term cycles are usually attributed to behavior and will be covered in Chapter 15, Pattern Recognition.

There are a few important ways to find the cycle, the most common being trigonometric curve fitting and Fourier (spectral) analysis. Both will require a computer and will be explained in the following sections. John Ehlers introduced Maximum Entropy ...