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The Price Wave - Forecasting with Cycle Analysis

What is a Price Wave? In simplest terms, a Price Wave is a simple symmetrical oscillation or fluctuation that moves from peak to trough and back again indefinitely. Just one interval of this wave (from top to bottom back to top again) is called a 'cycle'.

All freely traded markets are made up of these Price Waves. That is the common element of all markets. It is theorized that all price movements of all stocks and commodities consist of the same type and number of these price waves providing a degree of predictability of when the market is going to reverse. Once you have come to understand these price waves you will gain a better understanding of how they produce the resultant peaks and troughs (tops and bottoms).

Because these price waves repeat indefinitely, cycle after cycle, once you have identified the wave pattern itself you can determine its value at any point in the past or future. This characteristic of price waves is what gives it a degree of predictability.

Take any price chart, such as Cotton, Soybeans or the SP500, and it is possible to look at it and note a wave-like motion. You can apply a moving average, a Stochastic or some other oscillation indicator and these wave-like moves become even more evident. But more is needed than just noting these waves in order to arrive at an estimate of what the market will do next.

There are questions that every trader asks when looking at a price chart. Should I buy or sell? Should I wait? How high up will the market go? How much should I risk? If I exited now would I be leaving too much on the table?

The purpose of the above discussion on price waves is to set the stage toward your understanding of what makes up what you see on a price chart and that by knowing the price waves involved that you can obtain answers to the questions asked in the previous paragraph.

But understanding of price waves cannot be achieved by simply reading a single article like this alone. More research and extensive study is required, and how far you go in your ability to forecast market price action will be directly tied to the amount of time and effort you are willing to put forth.

I present you with this article in order to help you get started. If you are impressed with the fact that cyclic concepts can provide you with a lot of information as to the probable direction of market prices, then perhaps you'll be strongly motivated to go to the next level.

 


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Suppose you are looking at a chart of the SP500 and by way of cyclic analysis you note that price has been in a downward swing. Noting that the ebb and flow of all the price waves that make up this market pattern show strong evidence that it is ready to start on its up swing. Without even knowing precise details there are things you can determine from this information.

1. Now would not be the best time to short. 2. Prices are likely to stop dropping any time now.

From this you can decide to tighten your trailing-stops, not initiate any more sells, and prehaps prepare for possible trend change. This is just the basics. With a proper cyclic analysis, you can determine the best place to enter your trades, where to put your risk stops, and where to anticipate your profit objective price points. From this you can determine your risk-to-reward ratios and determine whether conditions are favorable for a trade.

If this appeals to you, then all you need now is to know what direction to go to learn. For this I would suggest that you do a search on the Internet on Cycle Analysis and use the names Edward Dewey and J.M. Hurst. I would provide you with the exact publications if it were not for the fluid nature of the Internet and pages changing all the time. By doing a search on the above terms and names, you'll find what you need to get started in making a cycle analysis.

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