How to trade a range bound market oscillating in a cycle mode
Introduction to multi timeframe analysis
In the lesson 1 we concluded that prices for stocks, futures, cryptos or any assets that are traded in free markets keep moving in zag- zags. Those up and down moves are driven by ever-changing sentiment of market participants. When they feel that price dropped too low, bulls step in buying at attractive looking low prices pushing price up again. When price reaches some point when the market starts thinking it got too high and too fast bears step in and start selling pushing price back down.
As a result, sometimes we get oscillating looking stock charts:
On the lower panel of the chart you can see an oscillator that tracks a cycle behind the price moves rather well. When a cycle hits the bottom (“troughs”) the bearish sentiment reaches its peak. When a cycle reaches the top (“peaks”) bullish sentiment reaches its peak.
On the chart you can see green and red horizontal lines printed by the Monkey Cycle Indicator. As you can see, price often does not make tops and bottoms at the moments when the underlying cycle does that.
Moreover, very often price makes brutal turns making it difficult to enter a position at the moment when an upcycle reaches it top and a new down cycle starts. This is why for successful trading you should take into consideration several timeframes. If you are a day trader, you first check what is going on 60 min chart but then you switch to 5 min chart or even 3 min chart to fine tune your entries and exits.
Let’s study closely at an up cycle that started in NQ-mini on 60 min timeframe around 12–00 PM on 25 Jan 2022 (see the green arrow):
That up cycle printed a cyclical resistance at 3–00 AM EST. As you can see, bulls ignored that cyclical resistance (the red horizontal line on the left panel of the chart) and kept pushing higher. If you only looked at 60 min timeframe you would have most likely entered a short trade prematurely and would have got stopped.
What helps you to avoid such bad entries is multi timeframe analysis. What you should do is to keep watching 5 min chart and wait until you get first Strong Buy and then Exit Long setup. As I mentioned the cyclical resistance was printed at 14,300 at 3–00 AM EST. The Strong Buy -> Exit Long topping signal was printed at 5 min timeframe at 14,459 at 8–30 AM EST. Not only would you avoid a bad short entry but you would have been able to play a winning long setup on 5 min timeframe before going short:
Now let’s study a down cycle that started next on 60 min chart:
As you can see, the indicator printed the green support at 13,990 at 6–00 PM EST. When the indicator prints a cyclical support that means that the preceding down cycle has either bottomed or about to bottom. Sometimes In that case the price immediately bounced back up to the broken support. If you decided to chase the price you would have made a really bad long entry. Sometimes price turns up strongly and starts rallying. Sometimes it comes back down to the support and even overshoots it. That creates an uncertainty about the right time to enter a trade.
This is when again multi time frame analysis comes in handy. When we track a down cycle on 60 min timeframe we always closely watch a lower5 min timeframe. Wat we look for is the bottoming sequence: first Strong Short signal to get printed and then Cover Short signal to follow:
As you can see on the 5 min chart shown above, when the cyclical support was printed on 60 min chart in point 1 the bottoming sequence did not even start!
The first bottoming signal “Cover Short” was printed on 5 min chart 2.5 hours later and 160 points slower!
Unfortunately, even that signal does not guarantee that you will nail the exact bottom of a down cycle. In taht case the indicator identifies the second bottoming pattern and printed the second bottoming sequence at a slightly lower level. The final “Cover Short” signal did nail the exact bottom!
We can make several important conclusions that can improve your trading results if you take into consideration signals produced by the Monkey Cycle Trader indicator:
- Do not consider a new cyclical support as an immediate buy signal. Always wait for confirmation of completion of any down cycle on a higher timeframe in the form of a bottoming sequence printed on 5 min or 3 min charts.
- Do not consider a new cyclical resistance as an immediate short signal. Always wait for confirmation of completion of any up cycle on a higher timeframe in the form of a topping sequence printed on 5 min or 3 min charts.
- Those two signals “Strong Buy” followed by “Exit Long” that together comprise the topping sequence provide a good long trading setup.
- Those two signals “Strong Short” followed by “Cover Short” that together comprise the bottoming sequence provide a good short trading setup.
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