A Definition of Cyclical Analysis
Cyclical analysis is based on the principle that price movements are ordered in cycles. It derives from the mantra so dear to technical analysis that "history repeats itself." Incidentally, cyclical analysis theorizes the existence of cycles but contemplates deviations from what are considered "ideal" cycles. As such, the present is certainly not equal to the past, but it provides several similarities compared to the latter. In turn, cyclical analysis derives from the theory of economic cycles, according to which economies unfold in moments of recession and moments of growth, presenting lows and highs. Generally, and in relation to all ordered markets, cycles are measured starting from the lows. These tend to remain constant, while the highs can vary, probably because they are more susceptible to emotions. Cyclical analysis contemplates the existence of multiple cycles. As such, at any given moment, an asset can be traversed by two, three, or four cycles simultaneously. Here is an overview.- Long-term cycles, which last at least two years
- Seasonal cycles, which last at least one year
- Intermediate cycles, which last from two months to six months
- Trading cycles, which last at most one month
- Alpha and beta cycles, which last two weeks each (and usually compose a trading cycle)
- Kondratieff cycles, which last a full 54 years
The Principles of Cyclical Analysis
Cyclical analysis consists of some principles. Or, better said, characteristics that belong to all market cycles. Here is an overview.- Principle of summation. It is a conventional principle, in the sense that it serves to provide parameters that can be used for summation purposes. In any case, it suggests that the sum of all market movements "makes up the entire economic cycle."
- Principle of harmonicity. According to this principle, the length of cycles is in a ratio of 1 to 2 or 2 to 1. If a cycle lasts 20 days, the next short cycle will last 10 days, while the next long cycle will last 40 days.
- Principle of synchronicity. By contrasting two cycles of the same size, the lows will tend to overlap. In essence, this principle theorizes that cycles of the same type have roughly the same length.
- Principle of proportionality. According to this principle, the length parameter and the amplitude parameter are proportional to each other. As such, a cycle that lasts a long time will tend to produce lower highs than a cycle that lasts a short time.
- Principle of variation. In a sense, this principle refines and better frames the previous principles. It suggests that the principles of harmonicity, synchronicity, and proportionality outline trends and do not represent rigid rules.
