The focus of technical analysis is on how the prices of assets develop as time progresses. This means that there are two basic elements in technical analysis: prices and time. Most of the theory that’s been developed about technical analysis focuses on price, whereas time has received a lot less theoretical attention. In this article we will look at time and how it affects your trading.
It is a commonly held belief among many traders that analyzing time cycles can give the greatest insight into market developments available. The argument put forward by such so-called cyclic analysts is that it is every bit as important to know when the market will move as it is to know where it is going. This is obviously very important when trading in binary options, seeing as you will have to choose an expiry time for your options.
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As should be obvious to any trader, technical analysis looks at how markets move over time. All sorts of tools used in technical analysis – oscillators, trends, candlestick patterns, etc. – all relate to the relationship between time and price. None the less, the majority of traders overlook time as a factor and only focus on price movements. This is not advisable.
Time cycles have a significant effect on the general market sentiment. By utilizing cyclical analysis any trading instrument can achieve greater precision. You will be better able to identify genuine trend lines by using time cycles.
Cycles are made up of crests and troughs. This simply means tops and bottoms, respectively. The duration of one cycle equates to the time that elapses between each trough.
A cycle is defined by three characteristic features:
These three values are all that’s needed in order to define a cycle.
Naturally, all markets experience several cycles simultaneously. For this reason, cyclic analysts state that every market movement is in fact an amalgam of every ongoing cycle. This conviction is frequently referred to as “summation.” Cyclic analysts conclude that it is possible to extract and analyze all cycles that have a bearing on the market. Once you have come to understand every cycle in the current market, you should be able to foresee all future price developments.
This is by no means the only guiding principle for cyclic analysis. Other important principles include:
In order to become a cyclic analyst you will need to learn how all of these principles work.
Living up to a promise such as being able to predict all sorts of market developments by observing cycles, is obviously not easy. It is also true that market cycles will always show up more clearly after the event. They also occur on timescales that are too great to be relevant for binary options trading.
None the less, you can still learn important lessons here. Especially if you base your strategy on trends. Rather than focusing exclusively on the movement of the price, also keeping an eye on the element of time can enable you to make more exact predictions. The majority of trends move in periods. It would appear that there’s a common period that elapses between each reversal. At times such a cycle can co-occur with a larges cycle, and push the market towards a continuation pattern.
Realizing when such events happen can improve your ability to foresee upcoming reversals, continuation patterns and different types of price formations with greater accuracy. Clearly we are not talking about a foolproof method here, and it is tricky to offer specific advice regarding what to be on the lookout for. All the same, just by knowing about this aspect of price movements and taking it into account, you can improve the level of your trading.
Having said that, the most prominent application of time cycles is in conjunction with oscillators and moving averages. According to cyclic analysts, moving averages and oscillators are most efficient when used with half as many time periods as the leading cycle in the market has. If the market is in a 16 period cycle, your moving average should function optimally with 8 periods. If you are looking to optimize your strategy, you might want to start by focusing on cycles.