Chart A

Definition of Time Cycles
When traders talk about cycles, the majority of the time they are discussing time cycles within the market. A time cycle is when a security repeats its fluctuations within a given time period. For example in a 9-month cycle, the market will begin at a low, rally into the middle of the 4th month and sell back off into the 9th month (Chart A). This cycle will then repeat itself.

Draw Backs Of Time Cycles
The problem with time cycles is their tradability. A time cycle never repeats itself consistently, where the move goes up X amount in Y period and down X amount in Z period. As a result of sporadic fluctuations (volatility) between the start and end of the cycle, the trader lacks clarity and often times finds himself/herself entering too early and exiting too late.

Chart B

Realistic Example:
We are trading a 3-week cycle. We enter long positions initially. The position is entered and the market drifts lower, causing severe losses to add up. We cover the position towards the middle of the move for a loss (about 1 ½ weeks into the trade) and then all the sudden the market rallies. Now we are sitting on the sideline with a loss. If we held onto the position it would have been profitable, but at the time we sold the holding, a 50% loss was nearing and half the cycle had gone by (which means the peak should have entered by then). Therefore holding the position at the time appeared to be riskier (Chart B).

Chart C

The next time the trade is entered, the market does the same thing. Although this time we hold, because last time we failed to hold long enough and lost money. Now the position continues to decline. We now take a 75% loss in the trade, as the security fails to rally and instead continues to drift lower. Hence confusion sets in, as we are unable to identify when to take a loss or when to hold, when time cycles are applied (Chart C).

The Core Problem
The issue with trading "time" is that there are too many variables and not enough factors that identify the proper time to enter or exit. Therefore trading the cycle carries high risk, because the trader only anticipates a move and lacks the ability to place the odds in his/her favor by determining a low risk entry (simply because the variables of what will occur and in the fashion it will take place can not be identified). The only time we will attempt to trade time cycles is when the underlying security is caught in a cycle that reaps consistency 80% of the time and makes clean wave patterns. This rarely occurs.

If the cycles fail to consistently stick to the time cycle (meaning the moves are not consistent waves), then trading the time cycle remains high risk. Why? Because if you enter a trade and the position goes against you just one time, you could lose all your capital on the trade. If the cycle makes clean patterns, then a trade can be initiated based upon the cycle's actual pattern, with limited risk.

Time Is Not An Issue
We do not utilize time cycles often, if ever. The way we use cycles is in a completely different fashion, which carries a lot more common sense with it. 

Focal question for the next topic is simple, do you make money trading time or do you make money trading value? If the answer is value, then the next question is why would you focus on time?

The market is not based on time. What does this mean? It means you do not make money on the timeframe you hold a security. For example, if you buy ES and hold it for 1 month, this does not mean you will profit.

If you agree that value should be the focus, then you are likely asking yourself, then why do advisors make their primary focus on time? The reason is because the industry has accepted time value as the ideal excuse for when a recommendation goes south. The fact of the matter is if you are wrong about a positions value and move, you can easily say ”hold it for 5 years” and now the broker has 5 more years until he is actually wrong. This is just an excuse used by the industry, which recently has hurt numerous investors as they lost a great deal of capital in the recent decline.

If you want results in the market, time can not be a key focus. A successful trader will focus primarily on price. Remember, it is more important that the position goes from 900 to 930, rather than holding it for 1 month. Let’s take a look at a key ingredient for success, which involves using cycles in a new fashion, where price becomes the focus.

Chart D

The Real Market Phase
The market does one of two things, it either trends or consolidates (Chart D). Another way to say it is the market goes from small ranges to large ranges in a consistent fashion. These ranges vary in period of length, but consistently you will see the market move from a trend to consolidation back to a trend and so on. This one observation must be a cornerstone to any trading system!

Trending Phase
A trend is when the range enlarges in size. A trend occurs when higher highs are being made and very little overlapping in the move takes place. The trending phase is the ideal time to make money in the market, especially when you lack time to watch the market closely. 

The trending phase is the ideal market period to trade, but unfortunately trends only occur around 30% of the time. If you are a trader who only looks for trends, you will be sitting on the sideline a lot. This does not mean less can be made. In actuality, majority of successful traders only trade breakouts and trends. At the end of a trend comes the consolidation phase (this is important to remember).

Consolidation Phase
The consolidation phase is where the market falls between two ranges and moves horizontally. The horizontal movement occurs when traders are unsure of the direction they want to trade. This stage is extremely volatile and a lot of overlapping in market movement occurs. As a result of the extreme volatility, the risk factor of trading is increased.

Consolidation occurs around 70% of the time and is where most traders lose capital. The key to trading successfully during this small range phase is to keep expectations small. Majority of traders who lose money during this stage do not lose it because they were wrong on their direction of trade, but because they were expecting too much from the underlying move. This stage is where most traders let gains turn into losses. Keep expectations small during the consolidation phase if consistent results are desired.

Chart E

Using Cycles for Success
Our approach is simple and eliminates the common complaint traders often speak of, selling at the low and buying at the high. Since the market consistently goes from a trend to consolidation and back to a trend, we utilize the pattern to our advantage when trading. 

When the market is consolidating, we look to add positions for the breakout or following trend (Chart E). During this phase is when most traders are sitting and watching. After a breakout occurs, we then look to sell the position when signs of consolidation are nearing (exhaustion is seen). Most traders, instead, will wait for the breakout and then add positions after it occurs. This is often times referred to as "confirmation", but the result is entering the trade too late and near its end. This is why most traders say they buy near the highs or sell near the lows, the direct result of waiting for the so called  confirmation. Let's take a closer look.

When a trader waits for the so called “confirmation” of an entry, they often times are too late for an entry, resulting in less opportunity with much higher risk. With the combination of proper money management and utilizing the basic cycle formation of trend to consolidation, a trader will see dramatic changes in their results simply because their entry levels will move in synchronization of the underlying volatility cycles.

The approach utilizing value as the factor within cycles is different in comparison to most systems taught. Although if you can grasp a hold of the basic theory of how the market moves in a simple cycle from trend to consolidation, you will view the market in a whole new light and reap greater results. This is especially true when it comes to actively trading the indexes with the e-minis on daily and intraday basis.