THE HAnDbook of TECHniCAl AnAlysisthe daily GBPUSD chart from 2005 to 2007 was approximately 75 days. The half
cycle would then be (75/2) + 1 = 38.5 days. We round this down since N is odd (75),
making the half cycle 38 days. We therefore tune our stochastic’s lookback period to
38 periods. We see that it tracked and forecasted the cycle troughs perfectly, includ-
ing troughs during the period after the sample was taken. Note that the standard
14‐period default setting generated too many oversold signals as compared to the
cycle‐tuned oscillator. This illustrates the importance of tying the oscillators to the
dominant cycle in order to generate only significant and relevant buy and sell signals.
Let us also recall how we tuned an overlay indicator to the dominant cycle pe-
riod in Chapter 12. Refer to Figure 20.17. Here is an example of tuning the fixed
percentage bands to a dominant cycle based on the four‐hour chart of GBPUSD.
The average trough‐to‐trough cycle period was 133 bars. Using the third formula
would also yield ((2×133) + 3)/4 = 67.25. Rounding to the closest integer would
give us 67 periods or bars. We therefore set the band periodicity to 67 bars. The
band’s percentage of central value was derived via visual inspection. Notice how
the price band effectively contains price activity.20.5 Identifying Price Cycles
Trading in the direction of the trend is always recommended. Traders employ
cycle analysis to provide effective entries by indicating:■ (^) Cycle peaks in a downtrend for selling into the rallies
■ (^) Cycle troughs in an uptrend for buying the dips
figurE 20.16 Tuning the Stochastic to the Dominant Cycle on the Daily Chart of
GBPUSD.
Source: MetaTrader 4