Technical analysis focuses on how prices move over time. Still, most of the theory on technical analysis focuses on price movements. The other element, time, is somewhat neglected. While time is always a secondary factor to any technical analysis, especially when technical analysis is combined with binary options, time is such an important factor to successful trading that we will focus on it in this article.
Some traders believe that the analysis of time cycles enables ultimate insight into market movements. Even if you don’t belong to these so called cyclic analysts, not only being able to predict where the market will move but also when it will get there is an invaluable skill for every trader. Since you have to choose the expiration time of a binary option before you invest, this skill becomes even more important to a binary options trader.
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What are time cycles?
Technical analysis determines how price movements change over time. While this might sound trivial, it is an often overlooked fact. Trends, oscillators, moving averages, candlestick patterns and so on all analyze the relation of price to time. Still, when predicting future price movements of a market, most traders ignore the time factor and focus exclusively on price. That is a mistake.
Time cycles influence the overall market sentiment heavily, and by using cyclical analysis every trading instrument can be made more precise. Time cycles can help you distinguish which trend lines are real and which mere coincidence.
Cycles consist of top and bottoms. Often, bottoms are called troughs and tops are called crests. The length of one cycle is measured as the time between troughs.
Every cycle is characterized by three main criteria:
- Firstly, amplitude measures the height of each cycle. Depending on what kind of asset you are dealing with, amplitude can be measured in currency or points.
- Secondly, period is defined as the time between troughs.
- Thirdly, phase measures the time location of the last trough. Every cycle can be exactly defined with these three values.
Of course, every market goes through multiple cycles at the same time. Cyclic analysts therefore conclude that all market movement is the combination of all active cycles. This principle is called summation. In theory, they claim, every single cycle influencing the market can be extracted and analyzed. When someone understands all cycles in the market, he can therefore predict every future price movement.
There are a number of other principles for cyclic analysis: The principle of harmonicity claims that two neighboring cycles are usually connected by a small, whole number, in most cases two. In other words: If you can find a 10 period cycle in your cart, the next smaller cycle will most likely be a 5 period cycle, and the next bigger cycle will most likely be a 20 period cycle. The principle of synchronicity claims that waves of different lengths create troughs around the same time, which harmonizes cycles of different lengths. The principle of proportionality refers to the fact that cycles with longer periods usually have wider amplitudes, and cycles with shorter periods have narrower amplitudes.
How to use time cycles for binary options trading
Of course, claiming the ability to predict any market movement based on cycles is tough promise to keep. In any case, market cycles always seem more apparent in hindsight, and are mostly happening on too long a timescale to be traded with binary options.
Still, there is a very valuable lesson to learn for any trader with a trend based trading strategy: Instead of just analyzing price movements, paying attention to the time element can greatly help you make more successful prediction. Most trends, for example, move in periods too. There seems to be a common period between reversals. Sometimes this cycle coincides with a bigger cycles and forces the market into a continuation pattern.
Understanding when these events occur can help you predict future reversals, continuation patterns and other price formations more accurate. While this is no exact science, and it is hard to give you any concrete advice on what to look for, simply being aware of this element of price movement will help your trading.
The most important use of time cycles, however, is in combination with moving averages and oscillators. In general, theory claims that oscillators and moving averages work best when you use them with half as much time periods as the dominant cycle of your market. When your market has an 18 period cycle, for example, moving averages work best on a 9 period basis. When fine-tuning your trading strategy, cycles can be a good place to start.