V.11:2 (84-88): Cycle Analysis And Intraday Trading by John F. Ehlers

Cycle Analysis And Intraday Trading by John F. Ehlers

Veteran S TOCKS & COMMODITIES contributor John Ehlers explains how to make use of cycles analysis in intraday trading, heretofore a rarity. Take a look. Intraday traders have long had most of the technical analysis tools available to end of day traders—with one major exception: cycle analysis. Previously, cycle analysis has been difficult to incorporate into intraday trading because manipulating data files distracted from the business of trading. Now that situation has changed, and finally, cycle analysis can effectively be incorporated into intraday trading.

A unique aspect of intraday data is the ability to see each trade on a tick-by-tick basis. A new perspective of market activity is obtained when a number of these ticks are grouped together. The result is a bar chart where the horizontal axis is a tick volume axis rather than a time axis. Tick volume is different from true volume because any given tick can represent various numbers of futures contracts or stock shares. Nonetheless, the horizontal scale of the bar chart is significantly different from the conventional time scale.

By selecting different groupings of ticks represented in each bar on the bar chart, a trader effectively changes the compression factor of the horizontal tick volume scale. An interesting aspect of changing the horizontal bar chart scale is that data not cyclic in one scale is cyclic in another scale because the random variations are assimilated into a single price bar. Using cycle analysis software is not unlike bringing the mountain to Mohammed. When the market is in a cycle mode, future market prices can be forecasted on the assumption that the measured cycle will continue into the future. Establishing the proper compression often allows the market to be analyzed as being in the cycle mode.