Technical Analysis For Dummies, 3rd Edition

Chapter 17

Cycles and Waves

In This Chapter

Introducing business and financial cycles

Assessing seasonality

Conjuring magic numbers

We know that economies exhibit cyclicality and so do financial systems, usually described roughly as boom and bust. Many academics, private organizations, and central banks do extensive research on cycles. Technical analysts want to understand boom-bust cycles to get a trading advantage, but are cycles regular and consistent enough to make the effort worthwhile? In this chapter, I do a quick review of business and financial cycles and explain why understanding cycles is useful for Big Picture perspective, but technical analysis is a whole lot easier for making trading decisions.

One aspect of cyclicality, though, is seasonality, and there the historical data and statistical analysis is on our side — there is consistency and regularity to add to our edge.

Looming over both cycles and seasonality is the issue of whether there is some giant mystical order in the universe that dictates financial price movements. I look into magic numbers with a skeptical eye.

Defining a Cycle

The economic cycle is the process by which an economy (and the businesses in ...