Welcome to the world of time cycle forecasting. Our team at TradeSmith recently unveiled one of the most advanced time cycle forecasting programs ever offered to the public — one that we’ve had in beta testing with Platinum subscribers for months. Years of research went into developing this cutting-edge tool. Used correctly, Cycles by TradeSmith can potentially help you achieve more profitable trades and, at the same time, decrease your risk.
But time cycle forecasting is different from any of the other TradeSmith tools. The forecasts have their own nuances that, if you don’t understand them correctly, will cause you to be frustrated and potentially even unsuccessful in using them for your investments.
You’ve probably already been to the website and seen the results with forecasts for dozens of tickers projected to be moving either higher or lower. There’s an incredible amount of information on these pages and it can be confusing. But what do you do with seemingly conflicting information?
For instance, Alibaba (BABA) is currently in the Stock State Indicator (SSI) Green Zone, but the current forecast is showing that BABA could move lower into February 2020. Fortunately, most of the answers for situations like these are found within the Cycles by TradeSmith site itself.
Before we get into learning how to use Cycles by TradeSmith effectively, let’s look at the “big picture” of time cycle forecasting.
Time cycle forecast charts are not read like the “normal” charts you see on TradeStops or even Yahoo Finance. A normal chart that you’re used to reading tells you what the price was on a specific date. The x-axis is the date of the measurement and the y-axis is the price of the ticker. Time cycle forecast charts also use the x-axis and the y-axis, however — and we emphasize this — time-cycle charts are not forecasts of future prices.
Time cycle forecasting charts are not meant to tell you the future price of a ticker. So, what can they tell you? To understand this, you need to understand how these charts are constructed.
Briefly, we look at tens of thousands of time cycles over a large number of years when we’re putting together these charts. You can think of a cycle as a wave similar to this:
This represents a single cycle of time that closely matches the highs and lows of the past 12 years or so. We look for the best cycles that not only matched the highs and lows, but have also been the most profitable recently. This is what three cycles look like on a chart.
Once we identify the best cycles, we put them together into the composite forecast you saw on the BABA chart. The composite cycle takes into account the different varying length cycles and shows the likely path of the ticker being measured.
Now that you understand the basics of finding the cycles, let’s look at how the forecasts are displayed. There are three elements to time cycle charts.
- Trend (or direction) — What is the likely direction of the underlying ticker?
- Turns — When do we expect the ticker to change direction?
- Amplitude — This is the least important of the elements and can be easily misunderstood. We’ll go into more detail on amplitude shortly.
Let’s look at our BABA example. BABA is currently trading in the $180s. Do we believe that it will move to the $130 range in the next three months?
Emphatically, no! If you try to trade the time cycle forecasts and you bet the farm based on the amplitude of the forecast, it’s very likely that you’ll lose the farm.
The most important elements of time cycle forecasting are the forecast trend and the turns. The forecast trend is easy to understand. Is the ticker likely to move higher or lower? In the case of BABA, the current forecast is telling us that it is in a short-term topping process and the direction of least resistance is to the downside.
Let’s take a look back in the rear-view mirror for BABA. Our time-cycle forecast was created on Aug. 27 (shown by the vertical black line below). At that time, our algorithms determined that the likely direction for BABA was for it to bottom between the middle of September and the middle of October. And BABA did indeed move lower with its closing price moving from the $180 area to the low $160s on Oct. 8. You’ll also notice that the forecast line was all the way down to the $130 range at that time. Remember, the amplitude is the least important element of these forecasts.
After bottoming out, it began moving higher until it reached its current level. Now, the likely short-term direction of BABA is to move lower. You are probably asking yourself: What’s the best way to trade or invest in BABA right now based on the time cycle forecast?
As we know from the stock’s SSI Green Zone status, the long-term trend for BABA is higher. This is not the time to make a long-term bet on BABA dropping dramatically. (Note: I used the term “bet” on purpose. If you decide to ignore the proven TradeSmith signals, then you’re not investing, you’re gambling). So how do we take this forecast and use it for our own personal investing?
This is where we look at the “turns.” The turns tell us when the short-term direction is likely to change. If a stock is topping (in the gray range), the turn is to the downside. Conversely, if the stock is bottoming (in the blue range), the turn is to the upside. Our research shows that our turn ranges are extremely accurate. This can give you more confidence in planning a profitable trade.
Here are a couple of ideas for BABA. With BABA topping and the likely near-term direction to the downside, it could be a great time to be a little patient and pick up some shares as the stock moves lower. This could be done through limit orders for BABA below the market or, if you’re willing to own units of 100 shares, it’s possible to sell some out-of-the-money puts and pick up some premium while you’re waiting (this assumes you know how to sell naked puts).
You could always set up an alert in TradeStops to trigger if BABA closes below a set price (maybe below the $165 price range we saw a month ago) and re-examine the potential trade if the alert triggers.
The Cycles website gives a lot more information for each of the tickers. Underneath the “Current Status” for BABA is the “Cycles Description for BABA”. This describes the specific state of BABA using several of our tools.
We give you this information for every ticker in the Cycles by TradeSmith universe. Be sure to familiarize yourself with these, as they can help you to:
- Understand the current state of the ticker using all of the TradeSmith tools, and
- Decide what trading strategy might be best for you given your financial goals and risk tolerance.
When you first log in to the Cycles site, there is a very specific tutorial that takes you through the entire site and explains what you’re seeing. Be sure to go through that completely and let us know if you have any questions. Also, at the bottom of the dashboard is a link to our Help Center. Most of your questions can be answered there.
And finally, Marina and I will be presenting our educational webinar on time cycle forecasting and introducing you to the Cycles website in detail. Our webinar will be this Wednesday, Nov. 20, at 1 p.m. ET. Click here to register.
Even if you’re not able to join us for the live presentation, be sure to register and we’ll send you a link to the recording after it’s posted online the next day.
This is a very exciting opportunity and we look forward to sharing this new forecasting tool with you.
Research and Education Specialist, TradeSmith