The simple idea behind market cycles is that markets move in predictable cycles; certain assets go up, then they come down, then they go back up again, etc. There are two common reasons offered for why this may be the case:
1. People’s desires and psychology remain fundamentally the same throughout time, but each generation forgets the lessons of the previous one. Basically, the idea here is the same as the adage, “those who fail to study history are doomed to repeat it.” And so we have market cycles.
2. Another explanation is that the entire universe moves in cycles, and so it makes sense for markets to move in cycles as well. For instance, we go through the 4 seasons of the year cycle and the 24 hour day and night cycle. Some religions and views of ancient history also argue that the world is periodically destroyed and rebuilt, or that there is a cosmic “Big Bang” and “Big Crunch” that makes the galaxies operate in a cyclical fashion.
The explanation for cycles can be dissatisfying to many, as it is a highly subjective matter. Some may find cycles to be useless and unimportant as a result.
Simple Cycles for Traders
The following are a list of simple cycles:
1. The 38 year gold cycle. This cycle argues that gold returns every 38 years. In 1857 there was a banking crisis in the United States leading to panic gold acquisitions; 38 years later, a similar panic occurred in 1895 (related to the historical event of Panic of 1893). 38 years later, in 1933, the US Federal Reserve modified the US gold standard to increase the value of gold relative to US dollars, and also initiated some laws aimed at restricting gold ownership. 38 years later in 1971, President Nixon took steps towards fully abolishing any officially fixed exchange rate between the US dollar and gold.
Using Cycle Analysis in Trading
1. Identify a long-term trend that will be a safe place to store assets
2. Identify markets to swing trade, in the sense that I will look for signs of short-term tops to sell into, and then bottoms to buy at.
3. Understanding where we are in terms of cycles, in conjunction with studying the economic factors we’ve noted previously in this course, can be a great way for traders to succeed.