Hurst Cycles Trading Academy

The FLD Trading Strategy - Module One

Cycle Shapes

00:00:22 I speak a great deal about cycle of shapes. And it's not simply because I'm
a little obsessed by seeing cycle shapes in the markets. It's because it is a very useful
tool, I believe, for improving one's analysis and for understanding what's going on. And
for seeing through all the noise to what the cycles are actually doing. What do I mean
by cycle shapes?

00:00:23 Well, I mean, the shapes that are, that are drawn on a chart by the price
movement. Let's take a look at the price movement of the, here we go, this is the Euro
to US dollar. And so let's take a look at the shapes that have been made by the price
movement. At this scale, the shapes are really quite simple.

00:00:45 You can see, I tend to just draw straight lines over the price movement.
Now that's what I mean by, by seeing shapes. It's the shapes that are made by the
movements of the price. So why are there shapes in a price movement? There are
shapes in a price movement because of the way In which cycles cause prices to move.
And of course we understand that by means of Hurst cyclic principles.

00:01:14 If you're not familiar with Hurst cyclic principles yet, then take a look at
some of the learning material, make sure you've covered all the foundation material for
the course. I'm not going to go into detail about all the principles, but what happens is
that as a result of the way in which cycles combine to influence the price movement of
any financial market, you get shapes developing in that market, here is a very simple
example.

00:01:39 In this diagram, there are two cycles. The cycles are represented by this
purple colored line. And by this green line, these are of course sine waves that are often
used to represent cycles, which influence price movement. When the cycle is moving
up, price would move up. And when the cycles moving down, price would move down.
Now the way in which these two cycles work together on the price movement of a
financial instrument causes this blue line over here.

00:02:10 And that blue line Is effectively the price That we see rising up and then
falling down again. Now, here we are combining only two cycles and we're not strictly

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speaking, sticking to Hurst principles, because the principle of proportionality has been
ignored. As you can see, the amplitude of these two cycles is in fact equal and Hurst's
principle of proportionality tells us that the shorter wavelength cycle should have a
lower amplitude, but combining cycles in this manner makes the cycle shape more
clear.

00:02:44 And in fact, I've noticed in the markets that the principle of
proportionality often is the one that suffers the greatest degree of variation. And so I
find this a very useful diagram. Of course, that shape that I see, and perhaps it's just me,
but the shape that I see looks very much like a capital M.

00:03:05 This is the result of combining only two cycles. What happens when we
combine multiple cycles here is a diagram which shows what happens when you
combine multiple cycles. You can see all the cycles at the bottom of the chart. There are
many of them, and they've all been combined to produce this big blue price movement.
If you like.

00:03:26 Now, if we start having a look at this price movement, we are going to see
that same M shape repeated again,and again. Let me demonstrate for you. Here is of
course a very obvious M right up at the top, but there are other less obvious M shapes.
Here's one over here. And the other thing that you will notice immediately is some of
these M shapes are in fact, a little bit skew.

00:03:53 Let me change the color here. Let me show you that with a different color
here is an M shape, which you might argue is not really an M, but it nevertheless
consists of four legs and it follows the basic pattern of an M. It's just a very skew M,
okay. So that's what I mean by cycle shapes.

00:04:16 And that's why cycle shapes form in markets. How do we use cycle
shapes and what else can cycle shapes tell us about our phasing analysis and about
what's happening in the markets. Well, the first really important piece of information
that cycle shapes give us is they tell us what the combined effect of a whole lot of
cycles is.

00:04:38 They, in some ways, summarize the combined effect. Hurst as you know
defined underlying trend, which is the combined effect of all cycles longer than the
cycle that you're considering. When the underlying trend is bullish, in other words, all
the longer cycles are pushing the market upwards, then what tends to happen is that

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peaks occur late. This is what Hurst called Time Translation, peaks occur late and
troughs occur early.

00:05:12 It's a very, very important concept. Peaks occur late and troughs occur
early when the underlying trend is upwards. When the underlying trend is downwards,
peaks tend to occur early and troughs tend to occur late. Now, why is this important to
us?

00:05:33 Well, we're going to be trading. And if we're trading on the basis that we
believe an 80 day cycle trough has occurred, then it would be very useful to know that
we are expecting that trough to occur late or early. Okay. Because we're making
trading decisions on the basis of it. So, now how does this relate to cycle shapes? Well,
let me draw some very skew cycles here. And let me show you how two things are
connected.

00:05:58 When the underlying trend is up or bullish, then you get a distorted cycle
shape, which looks a little bit like that. Now this could be any cycle. This could be the 80
day cycle or the 20 day cycle. The important thing is, do you notice where the peak of
the cycle is? It's over here and it is indeed late. The peak of a cycle is pretty much never
in the middle of the cycle.

00:06:25 Let me draw an example of a cycle shape when the underlying trend is
negative, bearish. That is the M shape that usually results. As you can see a very
distorted M shape, but again, notice where the peak is in the cycle. The peak occurs
early.

00:06:48 In other words, before the mid point of the cycle, if I draw beneath both
of these, the actual cycle, then of course we expect the actual cycle to look something
like that. And so the peak of the cycle is here in the middle of the cycle, but where is the
peak in price? Well, if the underlying trend is negative, then the peak will be early and if
the underlying trend is positive, then the peak will be late.

00:07:15 So for me, cycle shapes are a really simple visual way of understanding
this fundamental concept of how underlying trend affects the price movement. So how
can we use that? That's all very well. We've identified cycle shapes. I've spoken about it.
Very interesting idea, but how do we use it? Well, what we do is we look at the cycle
shapes that are forming in a market.

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00:07:38 And we ask ourselves, is this peak appearing to occur late? Or is it
appearing to occur early? And what is the shape of the cycle that has resulted? By
looking at the shape of the cycle, we can understand what the underlying trend really
is. You're going to get very used to calculating underlying trend by looking at your
phasing analysis and writing your little numbers, plus one minus one, zero plus one,
therefore, you know, altogether that is a total of plus one.

00:08:13 That's the underlying trend you say with great confidence, but the actual
underlying trend is being revealed to us constantly by what price is actually doing. And
sometimes you will find that the underlying trend that is revealed by what price is
doing differs from the underlying trend that you've calculated.

00:08:32 What does that mean? Does that mean you're wrong or does it mean the
markets are wrong? I'm going to have to break some bad news to you. There's a,
well-known saying: the markets are never wrong. Okay. So if the underlying trend
you've calculated is not the underlying trend that you're seeing, then I'm afraid to tell
you that probably the underlying trend you've calculated is wrong.

00:08:54 So we use the identification of these cycles shapes constantly when

analyzing a market and I'm going to be speaking about it a lot. So it's very important
that you understand what cycle shapes are and why we use them and how we use
them. We took a look a little earlier at the Euro to US dollar. So let's go back there and
look at some of the cycle shapes that are playing out there.

00:09:16 So there's a really obvious, fairly M shaped looking cycle that appears to
be playing out over there. All right. And of course, I'm tempted to extend that line
down, to finish the M because for me, that is probably what's going to happen. And so
that's the first thing you do with the cycle shape. You can see them in the market.

00:09:40 As soon as you see them, you start doing what I've just done. You start
extending the line and saying, okay, this, this, this market is moving downwards. That's
great. You must also be very careful of that. Human beings have a fantastic ability to
recognize shapes and see patterns everywhere. And if you look up at the sky tonight,
no doubt, you will see several patterns there.

00:10:01 You'll see all kinds of shapes. Constellations. Now that should serve as a
warning to you because those shapes are, are not necessarily there. They're just shapes
that we happen to see the same thing happens in the market. You think you see a shape
and then, and then you realize actually it turned into something slightly different.

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00:10:20 So you must be careful with identifying cycle shapes in the market, but
they are very useful. Let's take a look at some other cycle shapes that are playing out in
this market at the moment. Let's look at this 40 day cycle that we can see here. Here is
the cycle shape, this 40 day cycle head. Now you can see it's a slightly skew M shape.

00:10:45 It represents a cycle with an underlying trend, which is bearish. Now at

the time when the shape started playing out in the market, so somewhere at
roundabout here, we could identify this shape as being an incipient bearish shape,
which meant that the underlying trend of this market was bearish. Now at the time, I
don't know if you remember, but back in late June or early July of this year, 2012, there
was a lot of discussion about the magnitude of this trough over here.

00:11:29 As soon as this cycle shape started turning bearish, that gave us very
useful information about what the magnitude of this trough actually was. Because if it
had been a very big cycle trough 40 week, 20 week, then we would have expected this
cycle shape to be bullish and not bearish.

00:11:51 And so at this time, somewhere early in July, we were able to say, okay, it
looks as if the, this big trough that we've been expecting hasn't come in yet. Okay. So
that's one way in which cycle shapes are very useful. Let's have a look at what is
happening over here.

00:12:12 According to this analysis, which I say about everything, because

everything is based on the analysis ,of course. According to this analysis we're probably
coming into a 40 day trough, as you can see, here's the nest of lows 40 day trough.
What is the cycle shape of this 40 day cycle? Well, I can already draw the cycle shape
here. That's it there. Now that's an interesting cycle shape.

00:12:39 Let me displace it a little bit and try to draw the same shape over here.
It's an interesting cycle shape because the peak occurs late, as you can see, which
implies that the underlying trend of the cycle is bullish, but the peak is not occurring
very late. It's occurring only slightly late. You will also notice that the second peak here
is not a lot higher than the first peak.

00:13:03 Okay. There's the level of the first peak. There's the level of the second
peak. There's only a small distance in there. So this is what I would call a slightly bullish
cycle shape. Now, why is that useful? Why is it interesting? Well, it's interesting

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because we need to compare that to what's happening with the analysis. What do we
expect in terms of the underlying trend at the present moment in this analysis?

00:13:28 Well, let's work out what we think the underlying trend is for this 40-day
cycle. The 80-day cycle is going up that's plus one, the 20-week cycle is coming down,
that's minus one. 40-week is going up and 18-month is going up. Let's add that all up.
And we get a total of plus 2.

00:13:46 Now an underlying trend of plus two is of course bullish, but it's not plus
5. Plus 5 is really bullish. Plus 3, I would call bullish. Plus 2 is somewhere between
bullish and slightly bullish. And plus 1 is only slightly bullish and of course, zero is
neutral. It isn't bullish at all. So we're at plus 2. So we're just about slightly bullish. So
what does this tell us?

00:14:12 Well, I mentioned a moment ago that the cycle shape is slightly bullish
and I've just calculated that we expect the underlying trend to be slightly bullish. And
so therefore we expect the cycle shape to be slightly bullish. So this market is playing
out exactly as we expect it to play out. What else does it tell us?

00:14:29 Well, for some time now, in fact, ever since we identified this trough here
at the beginning of October as the trough of the 80-day cycle, which we were able, in
this case, to do about a week after it occurred, so ever since perhaps the second week
of October, we've been saying, we expect this 40-day cycle to have a slightly bullish
shape. So for some now we've been expecting the shape that we can now see on the
chart.

00:14:55 Let me clear this. And so back in early October, we expected price to
move up to a first peak, then to come down to the intermediate peak, then to rise to a
slightly higher peak, because this is a slightly bullish cycle. Now what's another feature
of slightly bullish cycles, slightly bullish cycles will have a second peak, which is higher
than the first peak.

00:15:18 So that's the first thing. The second thing that we know about slightly
bullish cycles is that often the move down is fairly quick and fairly hard. And often the
cycle will end up slightly above this trough where it started. So we're expecting that
kind of move. All right.

00:15:40 Now, of course, we're trading on the basis of this 20-day FLD, and you
will know just the price has just crossed below this 20-day FLD. So how far are we

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expecting this move to go? Of course, we perform our calculations and do all that kind
of thing, but we use the cycle shape that we are expecting to inform those trading
decisions and to give us confidence in the fact that we're making the right trading
decision.

00:16:01 So yes, we do expect this move to be a fairly, fairly hard, fast move down,
because that is the nature of slightly bullish cycles. The other thing that we expect is
that we expect this trough to be slightly higher than the first trough, as I've already
mentioned, and therefore it is possible that this trade that we entered as price crossed
below the 20-day FLD might not in fact achieve its target.

00:16:25 So that is something that we need to bear in mind. We need to keep a

close eye on it. And of course, as we get further into the course, I'm going to be
speaking a lot more about this, but it's something to bear in mind that, of course we
enter the trade, expecting it to achieve that target. But we also know that the current
cycle shape is a slightly bullish one, and therefore it might not achieve that target.

00:16:47 Now, the previous trough was down here at about the level of 128. So
the target calculated from this FLD cross is possibly roundabout that level. So as price
approaches the level of the target, we're going to be watching it closely to see whether
it does achieve the target. And we'll be using the cycle shape to refine the trading
decisions that we're making.

00:17:16 Now there's one final thing I'd just like to throw in here, as a matter of
interest, about cycle shapes. Let's take a look at a bullish cycle shape. Here we go. It's
an M shape. As you know, now let's attach a neutral shaped, perhaps a slightly bearish,
cycle shape onto that. So the next cycle is going to be slightly bearish.

00:17:38 So it'll rise up to a peak. Then it'll come down again. Bearish. There we go.
So there are our two M's. This is the first M, up to here, M, up to there. And then the
second M is from here up to here, there are our two M shapes. That's M 1 and that's M
2. Now I'd like to show you something really interesting about two M shape cycles.

00:18:16 If you are familiar with Elliot wave theory, then you will notice how the
cycle shapes that we derive from Hurst's theory fit in very well with Elliott wave
theory. It's a question that people often ask me. And so I thought I would just include it
in this, in this particular video. So here is the Elliot wave count that I would do on these
two cycles.

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00:18:41 That's a one, that's a two, that's a three, wave four, wave five. Wave five
of course completes the impulse wave one. Then we have A, B and C, which completes
the corrective wave two. That is how Hurst cyclic theory fits hand-in-glove with the
Elliott wave principle, Elliott wave theory. People often say to me, but your cycles have
only four legs because an M shape has one, two, three, four legs.

00:19:17 And yet Elliot wave theory is all about five legs, but of course, Elliot wave
theory is about five and then three, that's Elliot wave theory. So that's a really
interesting side effect, if you like, of identifying cycle shapes in the markets, you can
start working with Hurst's cyclic principles, hand-in-glove with Elliott wave principles.

00:19:39 So it's something that we might occasionally do, although I am not an

Elliot wave expert by any means, but something we might be doing over the course of
the next few months.