Cycle TheoremIdentify A Cycle And Take Advantage Of It


  • The theory of cycles in forex states that all price graphs have a cyclical pattern and design a typical sequence of waves that tend to repeat every certain amount of time.

    If we take a graph in a growing trend, for example, and put vertical lines intersecting the relative minimums, we note that there are dividing waves generated by the price of the form of the first part being up and the second part being down.

    Each cycle that follows the other must be made up of a quantity of candles almost similar to the other nearby cycles. Usually the average number of candles in a loop is 60/65, but of course this is just a statistic figure, there are cycles of 25/30 candles and there may also be cycles of 100/110 candles each.

    Recognizing and identifying the cycles in a chart helps increase the chances of making the correct predictions.

    Examples of cycle theories are the Elliot wave and Dow Theory. The tools mostly used by chartists for identification of cycles are as follows: Fibonacci Time Zone, Fibonacci Spiral/arc, Fibonacci retracements, and Fibonacci Extensions.

     

    • Basics of Elliot Wave Theory

    Ralph Nelson Elliot discovered this wave principle around late 1920s. He was able to figure out the repetitive cyclic wave motions of stock prices, and concluded that stocks or even financial markets movements are neither random, nor chaotic. Ralph Elliot equally based his work off the Dow theory, which also viewed price from the perspective of waves. The Elliot wave theory was later proved to be accurate by Benoit Mandelbrot’s work in fractal geometry.

    Price is usually made up of trends and corrections, which are referred to as impulse and corrective waves in Elliot waves.

     

    Impulse waves are made up of five price movements, which includes three in the trend direction (Waves 1, 3, and 5) and two against the trend (Waves 2 and 4).

     

     

    The three waves in the direction of the trend are impulse waves, which contain three waves too, while the correction waves contain 3 wave each.

     

     

     

    Correction waves are usually 3, in an ideal situation. Two waves in the direction of the correction, which on their own are smaller impulse waves, and one against the main correction wave direction as shown in the diagram below.

     

     

    • Conclusion

    The Elliot wave theory can be a very reliable predictive tool in the hands of an experienced trader. I will advise further study into the theory as this article is only an introduction. Like other trading strategies, traders should ensure they are following the theory and principles as described, and should not try forcing out a pattern that is not on your charts.

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