Stocks & Commodities V. 25:4 (32-34): When To Trade With Cycles by John F. Ehlers

Stocks & Commodities V. 25:4 (32-34): When To Trade With Cycles by John F. Ehlers

When should you trade the cycle mode in a market and when should you trade the trend mode? Find out with this indicator.

In theory, trading with cycles is easy — just buy at the valley and sell at the crest. This is just a variation of the old buy–low, sell–high dictum. In practice, however, trading with cycles is far more difficult. Just for openers, the very existence of market cycles is ephemeral and we must jump on them quickly to take advantage of any market inefficiency they represent. This is demonstrated by the MESA8 measurement of the historical spectra of the Standard & Poor’s futures contract seen in Figure 1. The spectra are shown colorized over a 20-decibel range from white-hot, through red-hot, to ice-cold. Colorizing this way enables the display in a subgraph in synchronism with the bar chart. Figure 1 clearly shows how the dominant cycle in the data varies with time.

In addition, there are a number of other conditions that make trading with cycles more difficult besides temporal variability, perhaps to the point that the real question is, “When should I not trade with cycles?” The most significant among these conditions are signal to noise ratios, being swamped by the trend, and trend persistence.