Cycles Trading: Learning to Use Technical Analysis Charts to Your Advantage

Technical analysis charts simply plot stock price movements and help us visualize cyclical patterns. If you're new to trading, then you should spend a lot of time learning the basics. Use in depth and neutral references that show you the myriad ways of analyzing charts:

- If you're unsure about terms or specific vocabulary, then use Investopedia.com.

- For more in depth basic charting tutorials, we recommend using the Stockcharts Tutorials site.

Japanese Candlesticks:

As you've learned, your charts can plot data in different forms. We use candlesticks instead of other methods by mere preference; they are simply visually appealing and thus helpful to us. It is said that the creator of Japanese candlesticks was able to predict rice market prices with over 90% accuracy.

Candlesticks are great indicators of the next day or week's action, if you know how to interpret them. Thus you should first understand that a specific candlestick must be analyzed in context, or in other words, you must also examine prior candlestick formations as well.

CANDLESTICK FORMATION CHARTS Weekly or Daily?

A frequently asked question of beginners is whether or not traders should plot price data in daily or weekly intervals. Since our cycles trading strategy involves weekly observations, we first use weekly charts; however, since we like to buy on the best day of the week, we use daily charts. Furthermore, if we're looking for the best hour during the day to buy, we'll plot in an hourly chart. In other words, it's all about how precise you want to be.

Once you've got the basics, then you're ready to learn how to use more advanced technical indicators to your advantage. Technical indicators are equations developed to help us visualize key reversal points or changes in trends.

Interpreting Moving Averages

Moving averages (MA) are important for the following reasons:

- The position of one moving average line compared to a second can signal key long-term trend reversals.

- Moving average lines can act as support and resistance areas.

Most traders use the 200 and 50-day MA, but you might ask why are these numbers important? Well 200 days is considered enough time to measure an annual trend and 50 is 1/4 of 200. It's that simple.

We instead tend to use 240 and 60 instead, because it's a more accurate measure of the amount of trading days in a year and 60 is 1/4 of that amount.

After you've seen enough charts, you'll notice that when the 2 moving averages converge or crossover, then you get a change in trend direction.

In the chart below, we can see that when MA(60) is above MA (240), you have an upward trend. As lunar cycles traders, we examine shorter increments of time of 1 month or less. Thus, it could be more helpful for us to use MA (28) and MA (7), for one month and one week respectively. In both charts, you can see that when the blue MA line crosses over the red, a new upwards trend follows.







Part II: Momentum Indicators >>