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Anticipating Market Swing Skewing

At first glance, the subject of this article may raise some eyebrows. "What is 'Market Swing Skewing?'" Truthfully, it was difficult to arrive at a title to properly describe a common behavior found in all price charts in just a few words. But if you are reading these words, I'd have to say that, confusing or not, it got you reading it.

Now the question is whether reading on is likely to be worth your time. If I may solicit your trust early on, I would say "absolutely".

In order to keep the size of this article contained to a length that would allow us to forego having to find an outright book publisher to print it, there are several articles that cover the subject of Market Cycles at http://www.amazingaccuracy.com/investing-articles.php. So we won't go into the subject of describing what market cycles are, but instead, we will discuss "skewing".

It is well known that a market's price action moves in 3 basic directions. These would be UP (bullish trend), DOWN (bearish trend), and sideways (non-trending).

While price action is made up of many underlying cycles of different cycle-lengths (frequencies) working with or against each other, we will simply focus on a single cycle in order to help explain "skewing". The benefit of understanding the "skewing" of market swings will become evident once you see how it relates to market timing.

Sinewave Example

Above is a cycle pattern called a Sinewave. We will use this for our "skewing" example, although it is important to point out right away that cycles by themselves do not skew unless affected by some external stimuli. However, I want to make this as simple as possible to explain, so we're going to assume that this single cycle actually represents a market pattern as seen on a price chart, such as shown below.

sinewave of price bars

 

Of course, you would never see a price chart like that above because price action is not the result of any single cycle, but rather, multiple cycles of differing lengths. We will assume a single cycle pattern in order to help explain skewing.

In terms of price direction, we would consider the above price direction (trend) to be sideways.

Our example price chart above clearly shows what we would consider to be Swing Tops and Swing Bottoms along this overall cycle pattern. Each Swing Top forms after the same number of price bars, from Swing Top to Swing Top. The same goes for each Swing Bottom to Swing Bottom. This is a fixed-length cycle pattern. Assuming you knew the length of this cycle, you could easily forecast when each new Swing would form to the very bar.

When it comes to forecasting market turns based on cycle analysis, if we assume a highly accurate cycle turn forecasting algorithm is used, we should expect the accuracy to be at its very best when the market is moving sideways (less skew).

But markets do not always move sideways, but instead, will trend upwards or downwards for some length of time. This 'trending' is the result of several underlying cycles working with each other (moving in the same direction) for some period of time, as well as a longer cycle-length cycle now going into its upswing or downswing. When this occurs, you get your trend pattern.

To illustrate this, let's first reduce the above price chart into a series of fixed-interval swing tops and bottoms.

Now, let's now change this pattern in order to represent a market that is trending upwards.

You should quickly notice that the distance between the swing top to swing bottom has shortened, while the distance between swing bottom to swing top has widened. This is SKEW. Due to the 'force' causing the pattern to push upwards, the time for each Swing Top to arrive after a swing bottom has increased as this market puts more time into going higher than it does going lower. That's the nature of a BULL TREND.

The opposite is true for a BEAR TREND, where you are more likely to see the time from the Swing Bottom to the next Swing Top to shorten while the time from a Swing Top to Swing Bottom increases.

So let's now assume that we have a means to forecast market turns to within a narrow degree of deviation, say within +/- one price bar on whatever time-frame chart we happen to be analyzing. And let's also assume that this analytical approach to isolating market swing tops and bottoms finds its greatest accuracy (on time) when the market is moving sideways. Based on these assumptions, if the market then starts to trend in one direction or the other, we can expect Swing Tops to err in the opposite direction of Swing Bottoms.

For example, let's assume that our market starts to trend upwards (bullish trend). The tendency then is for the Swing Tops to 'skew' to the right (be more prone to be late in developing) while Swing Bottoms 'skew' to the left (be more prone to be early in development), as demonstrated by the bullish trend diagram shown earlier. Therefore, if we happen to be expecting a Swing Top to form from a particular price bar on the price chart (it can represent a day, week, month or whatever the chart's time frame happens to be), it will have a greater tendency to be late during a bull trend rather than early, assuming it does not occur on time that is.

 


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For a trend moving downwards (bearish trend), the tendency for Swing Tops will be to form early and Swing Bottoms to form late. So if you are expecting a Swing Top to occur for a particular price bar, it will have a greater tendency to be early during a bear trend rather than late.

The above illustrations and examples are simplied explanations for a more complex scenario. However, the points made are in fact quite valid and useful.

How useful?

Forecasting cycle turn dates is what I provide my client members within the Precision Trading Membership, among other things. The forecasted turns have a high degree of accuracy of producing a swing top or bottom within +/- one price bar. So let's suppose that we are dealing with a market that is currently in a strong bear trend. When looking to trade a bear trend, it is best to sell off swing tops that form at the end of a bear trend correction.

Knowing that there is a higher potential for those corrective swing tops to form EARLY or on time, as opposed to late, one could anticipate an early formed swing and be ready to capitalize on it rather than be overly concerned about entering too early. However, for those looking to trade against the prevailing trend, one would avoid trying to buy off the early bar of a potential swing bottom in a bearish trend and instead wait for entry off the late or on time bar.

If you are not currently trading cycle turn dates or something similar to this, you may not quite see the full value of market skew. But for the rest of us who do use turn dates, whether they be Gann or Fibonacci calculated or some proprietary method, knowing the likely skew direction for swing tops and bottoms during trending periods helps in narrowing our timing down in closer than not knowing.

 

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