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Trading Lesson: Riding the Cycles: Part 2

01/23/2018 6:00 am EST

Focus: STRATEGIES

Jake Bernstein

Publisher, The Jake Bernstein Online Weekly Capital Markets Report and Analysis

Many of you have asked me to present a series of technical articles as opposed to the trading behavior commentaries I have been posting. Accordingly, here’s the second in a series of articles about cyclical behavior in the capital markets, writes Jake Bernstein.

Let me begin with an apology for the hiatus since the last article in this series. We are now back on track. In this article, I would like to illustrate how I use major cyclical behavior as an investment vehicle. Specifically, the use of cycles alone is not sufficiently accurate and profitable. However, if one combines timing indicators and corroborating evidence with the cycle, the outcomes can be amazing.

As an example consider the following chart of the long-term cycle in Japanese yen futures (yen versus US dollar). As you can see the cycle has established itself through a number of repetitions as reliable in picking and projecting lows. We know from considerable research that using cycles to project highs is not as accurate as predicting lows. As good as this cycle may be, in the end, we still need to consider timing, and particularly in futures where leverage is so high that it can work for you or against you.

Shown on my chart is the cycle as well as another indicator, commitment of traders Net Long Positions as reported by the Commitment of Traders Report weekly. The areas in green show the correlation between cyclical lows and commercial buying activity. Note the powerful combination of cyclical lows and commercial buying activity.

It would be an oversimplification of the process to state that this is all we need. The final step is timing.

For this purpose, I move to the weekly chart and specific timing indicators which will be discussed in the next part of this series. Until then remember that the process of finding long-term moves using cycles consists of four parts. They are as follows:

  • Set up: this part of the process refers to finding reliable cycles
  • Confirmation: confirming the pending cyclical low with commercial buying activity
  • Follow through: finding a timing trigger to corroborate that a change in trend has occurred
  • Risk management: sending an appropriate stop loss and using a profit-maximizing strategy.

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