The Basics of Cycles
Cycles have three characteristics, amplitude, time, and phase. They are often represented by a sine wave on a graph. Amplitude is the height of the wave, time is the cycle length which is usually measured from one low point to the next, and phase covers the location of the low point in time. If you have two waves, you can measure the phase difference by noting the time between the low point of one and the low point of the other. Of course, if the two waves do not have the same cycle length, then the phase difference will change over time.
Cycle Principles
There are six principles that can be applied to cycles, and these are called summation, harmonicity, synchronicity, proportionality, variation, and nominality. I’ll cover the meaning of each of them in turn.
The principle of summation states that you can derive all price movement by adding together all active cycles. Cycle theory states that price patterns are formed from the interaction of two or more different cycles. If you can determine which cycles are added together, then you can project this into the future by projecting each cycle than adding them together, and you should be able to tell the future trends.
The principle of harmonicity suggests that cycles are related by a small whole number. For instance, if there is a 20 day cycle then is likely that you can have a 10 day cycle or a 40 day cycle too.
The principle of synchronicity says that cycles tend to bottom at the same time. This can be applied to different length cycles, such as the 10 day, 20 day, and 40 day mentioned above, where the 10 and 20 would tend to bottom when the 40 day cycle does, but will also work where same length cycles are in different markets or applications. Going back to the opening paragraph, a low point in marriages will correspond with a low point in immigration and a low point in stock prices, according to the theory.
The principle of proportionality says that there is a relationship between the cycle period and the amplitude. If the cycle has a longer time span, the amplitude or height of the wave will also be larger.
The principle of variation is a statement that, despite the tendencies described above, cycles can vary from these principles and they are not rules.
The principle of nominality says that all markets, despite their differences, have an underlying set of common cycles, the longest being 18 years, and subsequent cycles halving in length. Despite the principle of harmonicity, the analysts say that there is a change from this pattern when you get to 4 1/2 years, and the next cycle length is 1 1/2 years, one third.
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