I'll be adding more charts onto this post (and perhaps other content modifications) over the weekend, so check back if you're interested in this topic.
I recently read the manual Precision Trading with Stevenson Price and Time Targets, and found it interesting enough to want to summarize it here. The concepts presented deal with cycle analysis, which is often overlooked in technical trading, but is just as important next to price and volume. I'm going to try and make this as simple and straightforward as possible.
First of all, the concept of cycles is fractal, in that within large cycles there are smaller cycles, and within smaller cycles there are yet even smaller cycles. Fortunately for the purpose of trading we don't necessarily need to worry ourselves with the overly large or small cycles behaving within price. We don't want to get caught up in the minutia of the 1-minute price cycles (unless we're a manic scalping robot) and, unless you're an "investor" large dominant cycles aren't going to help you trade intra-day.
So, as presented in the book by John R. Stevenson, here's how he explains it:
There are two cycles; a Regular Cycle (RC) and an Inverted Cycle (IC).
Each of these two cycles can have three variations: a Regular Cycle is either in an Up, Down, or Sideways trend. The same goes for an Inverted Cycle (can be up, down, or flat), like this:
The characteristics of a RC are that it will have two swing lows with a swing high in between (think of a pyramid, bell-shape, or upside down "U").
While an IC will have two swing highs with a swing low in between (think of an upside down pyramid or a "U" shape), like this:
Some key concepts include:
- An Inverted Cycle always follows a Regular Cycle, a Regular Cycle always follows an Inverted Cycle, and because of this they can be examined in terms of "units" (see the illustrations that follow).
- The IC & RC are expected to be relatively the same length of bars.
- Stevenson mentions that the technique he introduces (I'm getting to it) can be used on cycles as small as 3-bars (5-min chart), but explains that a minimum of 8-10 bars produces better results.
- It is not important for swing highs/lows be in the exact middle of an RC/IC.
Being that an Inverted Cycle follows a Regular Cycle (and vice versa) they are considered a unit. Seen in the diagrams below, a RC (A-B-C) is followed by an IC (B-C-T) in their respective units, and an IC (B-C-D) is followed by it's paired RC (C-D-T).
So, there are two concepts J.R. Stevenson lays out in his manual for making, what he refers to as, Price and Time Targets (PTT).
-If your observation tells you that you're in a Regular Cycle you will label the most recent swing low with a "C", the previous swing high a "B" and the swing low prior to that an "A".
- Once you have identified and labeled the RC, draw a line connecting points A and C, clone this line, then project off of A to arrive at a PTT. Like so:A couple of things to mention at this point. I'm not benefiting financially in any way for this blog post, so I'm not going to cherry-pick the examples. The example above did not meet the Price and Time Target, but it did come close, and there is information to be gained from price not reaching it's particular PTT.
Also, ALWAYS USE STOPS! This is not an all-inclusive trading strategy. It's simply a guide to help you be on the right side of a trade by going with the dominant cycle in the market. As such, you should rely on price patterns for entries based on your cycle analysis, not the other way around.
So, that's the basic premise behind making PTT's. You identify the cycle, draw a line between the swing lows (if it's a Regular Cycle) and project off the swing high (or low if working with an IC) to arrive at a target for price in time.
The second Concept in this manual is referred to as a Cyclic Trend Line (CTL). It is used to help identify when one cycle has ended and another has begun. In keeping with the above chart with a Regular Cycle as an example we produce a CTL as follows:
- Draw a line through the price bars of the B-C line, connecting the highs to the lows.
- Clone this parallel line and shift it outwards, so that it touches only one price bar point. This is your CTL! When price closes outside of this parallel line, the cycle is considered ended.
Here's the same chart as before, only this time adding the CTL:So, we can see that price closed outside of the CTL, ending the Regular Cycle. That wouldn't necessarily be a trigger for entry. We would want to look for a price pattern to emerge to take action. In this example we got a retest of the CTL with a steep (78.6%) retracement (or "Phoenix", whatever you want to call it), so we would look to buy a breakout from that retracement.
One word of advice regarding the CTL; though it can be used on small cycles, more accurate results can be obtained by using it on cycle lengths of 10-bars or more.
OK, now time for some charts.
I pulled up a daily chart of FCX and there was a really straightforward Inverted Cycle that jumped out at me right away. So, included in the chart below are an Inverted Cycle, followed by a Regular Cycle (which comprises an Inverted Cycle Unit). The red lines represent the Price Time Targets:Seems simple enough, right? Well, here's where my brain starts to itch. Following this move in FCX price begins an upward consolidation cycle throughout much of August. All of a sudden we have these small (3-6 bars) RC/IC's, which produce targets that, though mostly hit, aren't very profitable on this time frame. So, it may be best to avoid this stock for the time being, or drill down into a smaller time frame to time entries/exits.
Overlooking the smaller cycles on this Daily chart, we give the stock some time to for investors/traders to determine whether they like price higher or lower from here, and in so doing we allow the predominant cycle to work itself out. Here's what things look like:
One more thing worth mentioning, if I haven't already; Regular Cycles and their mirror opposite (Inverted Cycle) will have approximately the same number of bars, take a look:
Well, if you have stuck with me thus far, you would probably like to know just how the heck you might approach trading these Concepts. Well, thankfully J.R. Stevenson included some very simple strategies for trading both with the trend, and counter to the trend. Here's what he says:
For trading with the trend;
If an RC is up, Buy a CTL break
If an RC is down, sell the PTT
If an IC is up, Buy the PTT
If an IC is down, sell a CTL break
Got that? Good!
Now if you prefer to counter-trend trade the cycle, he suggests;
If an RC is up, Sell the PTT
If an RC is down, buy a CTL break
If an IC is up, sell CTL break
If an RC is down, buy the PTT
Just keep in mind that to determine the direction of the cycle's trend from the slope of the A -C line (if a Regular Cycle) or the slope of the B-D line (if in a IE).
OK, OK, I'll demonstrate:
So, these are three good examples that demonstrate relative accuracy, but also the important matter of discretion that should come into play with these strategies.
- The first trade worked, so long as you bought on the close outside of that CTL (after all it was a strong bullish candle).
- The second trade didn't quite reach the PTT, so if you were eager you might have gotten in and perhaps quickly stopped out. Or, you might have waited for a pattern to develop.
- The third trade I included two purple CTL lines. If you would have bought the close outside of the CTL you would have been profitable in two days, before price broke down (fakeout breakout). Price continued lower, so you would have re-drawn the CTL to include these two consecutive new lows. In which case you got a break of the new CTL, and if you were hesitant to get in at this point (because you're still not out of that price range!) you would have (hopefully) waited for the breakout day to enter. If that were the case you would be sitting through a tight flag pattern before extending the initial impulse move. bravo! This measured move brought you right into the PTT target!
Needless to say, I'll be looking for a breakdown within this current Regular Cycle we appear to be in at this point.
OK, so one more example and then I'm ending this dissertation.
Looking at GS on a 5-minute time frame over the last two days (Thursday, Friday).
Here's what I see:Going in a little closer, here's what I'm looking at:
- The first trade coming out of the Regular Cycle down was to sell the PTT (that was not happening with such a steep selloff, as the PTT was skewed). However, you might have bought the retracement off the lows after breaking consolidation and testing the most recent swing high.
- Next trade, going into a Inverted Cyle was to sell the CTL line break, which occurred on the retracement from the morning's sell-off. Target the lows of the day for at least half a position. Price doesn't make it to the PTT, instead double-bottoms at the Low of the day.
- Trade three: Buying a close outside of the CTL. Otherwise, look for a retracement back to this CTL to buy. We get a "Phoenix" setup and expand higher into our PTT!
- Trade four: Go short from the CTL break (and mini bear flag), target the PTT or lows of the day, which is what we got into the end of the day.
A word regarding failure:
These examples all look well and good, but taking action in real-time is another thing entirely. For one, your CTL is going to be changing with price. Say you have a close outside of the CTL, and you're thinking the cycle is over, well price may still continue lower/higher, in which case you may get stopped out. You will be readjusting the CTL accordingly, and it's best to rely on pullbacks, price patterns, and/or candlestick patterns to base your trading decisions rather than solely the CTL break.
Also, the PTT isn't going to be a hard and fast target. It would seem that price failing to make it to a PTT can be telling you a valuable lesson in what the pace of the market is doing, and perhaps that sentiment may be shifting.
So there ya have it! It's a fascinating study. I have enjoyed it very much and look forward to sharing what I find from here on out. I hope you stuck with me through, what I was hoping to be, a straightforward look into this concept. After all, it's really just a look into the wave structure of buying/selling that's generated across the tape, showing which has more weight to it, the buyers or the sellers. All a series of measured moves.
Here's another example using the past few days in SPY (5-min). What's worth noticing is that price arrived at the PTT early (Red line on lower right). Also, the CTL's (purple lines) are all retraced against sharply before price breaks down/out, providing an excellent low-risk entry.
The setups I include on this blog are used in conjunction with the 3/10macd and the criteria I ascribe to it as a way to alert me to an existing condition of price. The key concept to take away from this blog is that I try to anticipate what will happen on the higher time frame by using a faster time frame to trigger the trade setup. I do not trade a "system" I use two indicators to clue me in to price conditions. Please read the Disclaimer located in the sidebar of this site. I can be contacted via email at email@example.com
I am always open to questions, comments, or suggestions on how to improve this blog.