What is Power Cycle Trading?
02/19/2013 1:00 pm EST
Larry Gaines talks about why he developed his model and what Power Cycle Trading does to help traders find great trades.
My guest today is Larry Gaines, and we're talking about power cycle trading, something he developed. Larry, first of all, what is power cycle trading?
Tim, Power cycle trading is something I developed about a year and a half ago. I've been trading professionally for over 30 years, and just from all the things that I've seen and experiences and observations, I wanted a system that was simple to use that I could actually use for my trading. I developed a simple-to-use four-step trading model. I first adapted it and turned it in for kind of longer term trading that I could use for kind of a macro picture to help me get in and out of just investments that I might have and things like that, but I found a need to have it developed further and take it down to different time intervals and trade across multiple time intervals and various asset classes.
The system model is based on pricing cycles, price volatility, and price momentum. I've developed some indicators that I use that incorporate all these together, along with some other trend breakout indicators. What I've come up with is a model that I use for picking cycle lows and cycle highs, so for me it's better to get in at a beginning of a trend rather then the end. This really helps to define those entry points. Then I've got some other indicators that I use for breakouts so I can get that added component to it. I was able to take the original model that I had and make it linear so I can trade across all assets and all timeframes, and if you have that type of model then you've got a successful system to use. From what I've developed, I've incorporated it into all my trading, and I also incorporate it to our members at options on the open and power cycle trading, and it's something that we use for all of our intraday trading, swing trading, and any longer term trades that we take, and it's based on this model.
What are the four steps? Can you talk some about those and how those work?
The model will identify a price range; it will identify a price cycle; it will identify price momentum, and it will identify volatility. It incorporates those kind of four components, and then the way that the model is set up, it will tell you based on that where to get in on a trigger entry, and we'll use multiple timeframes in order to, what I call, give us a confirming process so we don't get into a trade too early and we have a big equity drawdown, so we'll use multiple time intervals with this model to give us a good setup, and then we'll take the trade enter. Then for managing the trade we use a lot of different techniques for that. Some moving averages and other things, but you know that's part of it as well.
Does it rank trades or can you pull up any stock and it will give you an idea of where it is in the cycle for that particular stock?
Absolutely, that's the beauty of it. The simplicity of it is great because you can pull up anything that you want a stock or an ETF, gold futures, crude oil, you name it, put it in there with the model, and you can see where it is within a cycle based on the timeframe that you want to look at.
If you're an intraday trader we will tend to look at anything from five-minute timeframe down to 89 tick chart, so we'll look really narrow timeframe to about a five minute.
Then for our swing trades we'll use the same model, but we'll use a different time frame, we'll use the 60-minute, 45-minute, 15-minute, we'll go through those intervals for confirming setup, same model by based on those kind of timeframes, and then we can use it for weekly, for long-term, or even if we want to go macro we can use it on a monthly timeframe. It works great if you do it and break it down like that.
What I do with my members and teach them, I do what I call the macro top down market analysis. What we'll do is we'll take it, the power cycle trading model and we'll go from a top down analysis, so we'll start out with the macro timeframe using the model, so that's usually something we use as a monthly timeframe, so I can use the model and I can show you whatever market that you want to look at.
Let's say we want to look at the S&P; I'll usually use the S&P 500 Cash, SPX, and I'll pull up a monthly chart, I'll put the model on that, and based on the model you'll see are we in a cycle trend up or cycle trend down. I can show you where it got in, where it should get out. I can tell you if it is going to go neutral, and then if we want to go break it down a shorter timeframe, I'll go over five timeframes. I'll go to weekly, and that's my long-term, so currently the S&P 500 market has been in a weekly upturn based on my model since June 8. Then I go down to medium term daily, and then I go to the intermediate, which is swing trades, 60 minutes, 45 minutes, and then our day trades we go using a five-minute timeframe down to ticks. I can incorporate those five different timeframe scenarios and I do that top down, and we can get a really good idea of strategies, how to develop a trading plan or a business plan to trade the markets or invest the markets using this model, which gives you a defined system to use rather then off the cuff.