Cycle Analysis in Currency Forecasts

TECHNICAL ANALYSIS Cycle Analysis in Currency Forecasts

For starters, we greatly appreciate the opportunity to present our work in FX Trader Magazine for the first time. We have been familiar with the publication for years, and we know that many of our clients – hedge funds, family offices, institutions, brokers, and traders worldwide - are readers. 

This introduction is consistent with our observation over thirty years of experience that sorting through the overwhelming amount of information is one of the most difficult aspects of successful trading. We are all bombarded by the daily negative pressure and press coverage of the travails of the economy and all the diverse worldwide liquid markets, including the never ending attempts to explain why things are happening.

There is a tool that we have used for these three decades to successfully predict directions and prices across the spectrum of stocks, bonds, commodities and, the focus of this introductory piece to the readers of FX Trader magazine - currencies.

That tool is cycle analysis.

In fact, it was the wealthiest family in the world over a century ago - the Rothschild family - that pioneered the use of cycles. After the French Revolution in the late 1700s, the Rothschild family created the major banking house in Europe. The founder, Mayer Rothschild, sent four of his sons to London, Paris, Vienna, and Naples, respectively. This positioning enabled them to prosper during the British Industrial Revolution in the 19th century.

The Rothschild family created the structure for the international bond market, which made bonds more easily tradable. This was important following the difficult 18th century economic upheavals, which left many European countries in the 19th century with significant budget deficits (sound familiar?) due to wars – past and future (also sound familiar?).

These countries were not considered great credit risks (sound familiar?).

The Rothschilds prospered - and not only from the bond market. They hired scores of accountants to calculate “cycles” in agricultural commodities, interest rates and other economic indicators.

They researched across many hundreds of years to find prices in these areas. It is quite revealing to know that the word “cycle” comes from the Greek word meaning circle. (It is also interesting that the Charles Nenner Research Center called for the top of the Euro at 151 EUR/USD, and called for it to move down to 122 EUR/USD, and then 118 EUR/USD, three months before the first Greek crisis!).

While many think of cycle in terms of the nine-year inventory cycle or the 60-year cycle in interest rates, the Rothschilds plotted many “cycles” from sets of data series going back hundreds of years, in many asset classes. How? They found overlapping patterns where the majority of the cycle tops and bottoms coincided, and concluded that the confluence of many cycles (i.e, a sine curve formed from a cycle showing a top every five weeks in corn prices, a top every twelve weeks, etc.) was the predictor of top or bottom.

According to their calculations, this large amount of data increased the likelihood that the combined cycles would give accurate predictive postures for all the categories of traded instruments. The results were quite positive for them.

This was laboriously done before computers.

Obviously, things are a bit easier and faster nowadays. However, because of vast computer power, there is so much data available today, that another problem exists for traders - wading through massive amounts of differing forms of analyses.

This info overload, when added to the current market moves amidst significantly increased volatility, has increased the difficulty of arriving at comfortable trading positions.

Cycles can help. They are based on only one data point – price – in each category – stocks, bonds, commodities, or currencies. Cycle analysis takes into account repeating patterns from the past, and assumes these patterns will continue.

The unique tool of utilizing cycles can also lead to other considerations.