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Cyclical analysis is a methodology for analyzing financial markets that studies the periodicity and recurrence of certain patterns, based on the idea that price movements are the sum of cycles of different lengths that tend to repeat over time. This approach seeks to identify the "seasons" of the market to understand the current phase and anticipate future price reversals, thus helping traders to position themselves strategically and build more coherent operational plans.
Fundamental principles of cyclical analysis
Pattern recurrence:
Financial markets do not move chaotically but are subject to periodic cycles that repeat over time, with highs and lows at specific intervals.
Multi-level cycles:
The cycles are characterized by different lengths and overlap. There are short, medium, and long-term cycles that, when combined, determine the overall market trend.
Cycle components:
Each cycle is described by three components: amplitude (the vertical extent of the movement), period or duration (the length of the cycle), and phase (the current position within the cycle).
Principle of the sum:
The movements observed in the markets are the result of the sum of all active cycles intersecting at that moment.
Synchronization and harmony:
Cycles tend to form coinciding lows ("synchronization") and are connected by relationships of multiples and sub-multiples of frequency ("harmony").
How it is used in trading
Identification of market phases:
The goal is to identify the phase of a market (recovery, expansion, slowdown, or decline) to understand the direction of the main trend.
Prediction of reversals:
Knowing the phase of the cycle and its duration allows for anticipating future turning points in the market, namely potential highs and lows.
Strategy construction:
Traders use these forecasts to define entry points, stop-loss, and take-profit, improving the effectiveness of their operational plan.
Tools used:
Specific indicators and methods based on fractal logic are employed to define cyclical structures and identify the forces acting on prices.
Advantages of the cyclical approach
It provides a more holistic and philosophical perspective, going beyond short-term fluctuations to understand the natural "rhythm" of the markets.
It allows for contextualizing the current trend within a broader framework, helping to navigate the markets more securely.
It offers a method to interpret historical events and link them to current dynamics, providing a "map" for investments.
