A new cycle analysis trading technique
by Russell L. Miller
This article describes a novel cycle-based day trading system that, under testing, turned in nearly a
300% annualized profit on equity. In most cases, trading with cycles involves entering a position at a
cycle peak or valley and holding the position through a half cycle until it's time for the direction to
change. My system, on the other hand, uses cycle analysis to predict the direction of the next day's move
in a commodity so that a long or a short position can be entered at the next day's open and exited at the
close of the market.
I chose day trading to avoid the risk, insomnia and high margins involved in overnight positions. I set up
entry and exit rules for the trader who wants to make a decision the night before and not be tied to
watching the board all day. The tools used in this system include spreadsheets and MESA, a cycle
analysis program that measures any cycles that exist in any set of 60 data points and predicts the next 15
data points on the assumption that the cycles will remain unchanged.
I first tested a synthetic data file made up from a pure sine wave with MESA. This was too easy, so I
changed the data file to a compound wave created by adding three sine waves with out of-phase
frequencies and varying amplitudes (Figure 1).