Profitable Cycle Trading Method - Part III

Read Profitable Cycle Trading Method - Part II here.

Cycles are rough sine waves. A cycle moves up until it reaches a high then curls down moving downward until it reaches a low before it curls upward once more. When a cycle has bottomed out, curls up, and then starts moving upwards we can say that it is in an upward trajectory. When a cycle tops out, curls down, and then starts moving downwards we can say that it is in a downward trajectory.

Lets start with the 13 minute chart cycle (emulated by the smoothed stochastic). In our example the trend is short. We are looking therefore for a short entry.

In looking at the 13 min cycle we want to see one of two things – either the 13 min cycle is topping out and is about to curl down or it is already in a downward trajectory and in the first 2/3 of its downward move. We can say that the 13 minute cycle is topping out when it reaches approximately 85 (on its upward trajectory) or that its in the first 2/3 of its downward trajectory when its still above 30. If the trend is down and the 13 cycle fulfills one of these two criteria we can move on to check the 3 minute. [If the trend is up then obviously we are looking for the opposite criteria in the 13 i.e. Bottoming out at approximately 15 or in the first 2/3 of its upward trajectory and still below 70]

Suppose for example’s sake that the trend is down, the 13 min cycle is about to or already has turned down, then we can move on to refine our entry timing by looking at the 3 minute cycle. The sign that a short entry point is about to be triggered is when the 3 minute reaches the peak of its up cycle and is right on the turning point to start moving down. Imagine it moving upwards the angle of ascent becoming shallower and shallower until it reaches a point of equilibrium. That is the trigger point, right before it turns down.

Step 3 – Precise entry

When the 3 minute chart gives us an entry signal we move our focus over to the one minute chart to look for a precise entry point. At this moment we leave the realm of exact timing - it becomes more a question of feeling the price action to get a good entry. It’s really up to you how you do that. The TICK chart can be helpful, pivots, trendlines, support and resistance points even gartleys. Basically you are looking for the price to reach a point where it ends its momentum and turns in the direction that you want to go.

The 3 minute cycle will have narrowed the entry point to usually within 10 ticks (on the YM). So you will be very close at that point. However the market doesn’t usually turn on a dime so you will need to judge the entry with some discretion. If you look for an appropriate turning point (using the tick, resistance etc etc or just by eyeballing when the prior move seems to have run out of steam) and place a ten point stop then you should usually nail it.

I cannot emphasize enough the importance of practicing entries on a simulator for a few weeks so you can get comfortable with the execution process.

This is an example of a short entry on the 3 minute chart. Assume that the trend on the 13 minute chart is down and that the 13 min chart cycle is on its downward trajectory. Looking to the 3 minute chart here we note that the trend is also down (23 ema red line is below the 50 ema blue line). We would be looking for an entry point right as the 3 minute cycle hits its peak (see the thin red line of the crosshair). As you look up at the price you can see it is turning and we would probably have got an entry at around 10465. We would then have pared off at +10, +20 and been stopped at +10.