Tuesday, June 29, 2010

Are there cycles in the market?

Does the stock market move in cycles? Do prices rise and fall with some kind of regularity?
If there are cycles in the market then a trader who can identify these cyclical turns can make a lot of money. So we will take it for granted that smooth, easy to use cycles do not exist. But what about rough, difficult to use cycles?

After all, most patterns are visible only in the eyes of a beholder. Look at a head and shoulder on a chart. if you are a techncal trader you can spot the pattern in seconds. But, show the chart to your friend who is in the market but not into technicals. She may be a market participant, but she is unlikely to spot the pattern.

Therefore, it is possible that cycles do exist which are detected only by some traders mainly because they have practised for years to identify such cycles. Then, why do these traders not make much money? I think it is the same reason that prevents you from making money on the head and shoulder pattern that you easily identifed on a chart!

Trading is not just about setups. It requires (a) discipline to trade the setup (b) Capital to withstand the inevitable drawdowns (c) Mental ability to accept that some patterns will not work even when identified correctly, (d) Fortitude to continue with the patterns after a period when the pattern keeps on failing, and, so many other reasons.

Does this one chart line spell doom for the markets?

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