The use of cycles is perhaps the most widely misunderstood Aspect of technical analysis of the markets.

There are four stages in any market. This applies equally to Forex, Stocks, and Futures. Any market that you can chart can be analyzed with cycles. The reason for this is natural moves in cycles.

All studies, patterns, strategies, in fact every aspect of trading is most effective when applied to the correct cycle.

The use of cycles is perhaps the most widely misunderstood Aspect of technical analysis of the markets.

Some traders believe that the market moves in cycles with price action unfolding in rhythmic patterns. One example of a cycle in nature is the amount of time in a day. The Earth completes a full rotation on its axis every 24 hours, following a cyclical pattern. An accurate forecast of daylight can be developed from this cycle. Traders have identified similar recurring cycles in the stock market.

A perfect cycle can be defined by a sine wave, and in the markets, a cycle unfolds as prices rise and fall largely synchronized with the calendar. In the stock market, traders have identified cycles lasting 40 days, 13 weeks and 52 weeks. These cycles change over time and are only approximate.

Various techniques are used to identify cycles in the markets. The simplest approach is visual, such as noticing that stock market lows often occur in October. This allows the trader to mark lows each October and expect highs halfway through the cycle in April.

More sophisticated mathematical techniques include the Fourier transform and more precisely define cycles.

Cycles are described by their phase (the amount of time since the last bottom), amplitude (the size of the move from high to low), and frequency (the time between two consecutive bottoms or consecutive tops).

Multiple cycles are at work in any market at a given time. That makes it impossible to forecast market action with absolute certainty since expected highs and lows for different cycles can be in conflict. Cycle analysis can be a valuable tool for traders when used with other indicators.

Traders use cycle's as an approximate guide to market timing. With a cycle, the trader can identify the probable turn date for a market in advance.

Traders can look for other indicators to confirm the market reversal near the predicted dates where a market turn is predicted by the cycles.

While some cycles come nearly on schedule, there are other times when cycles can invert and the price action moves completely opposite to expectations. 

Cycle analysis can be successfully used by some traders and some markets do seem to generally follow cycles. This can be a valuable forecasting tool and many traders will know the key dates when market turns are predicted by cycles. They will usually only take the trading signals when they are confirmed by other indicators.