To illustrate the importance of time, assume two individuals apply for a $10,000 loan with a due date five years from now. To keep the price part of the equation identical, let’s assume each borrower has the same income and ability to repay the loan. If this is our only input, the risk between the two loans is identical—both want to borrow the same amount, and both earn the same amount. However, if we introduce time, our risk profile changes dramatically. For time, let’s look at the age of the two borrowers. Oops, one of the borrowers is 25 years old, and the other is 98 years old. We can all see that getting paid by the now 30 year-old is much more likely than the 103 year-old. If it were my money providing the loan, I’d pick the 25-year old.

In the stock market, we don’t issue loans, we purchase shares which rise or fall in value. We get paid when we purchase shares that rise, and we lose money by purchasing shares that fall. When prices are rising, they are in an uptrend, when they are falling, they are in a downtrend. These price trends age just like people do. And just like the age of a borrower matters to a lender, the age of a price trend should matter to a trader. When we talk about the age of a price trend, we use different terminology than we do with people. While a person may start as a newborn, then become an infant, followed by a toddler, child, and eventually an adult. With price trends, we use terms like daily, intermediate, and yearly cycles.

Cycles can seem confusing, but they are nothing more than a predictable pattern of rising and falling prices over time. By continually looking for cycles on a chart, they eventually start to jump out at you. Cycles occur over multiple time frames. The three that we focus primarily on are daily, intermediate and yearly cycles. Each sector of the market is affected by different economic factors, so the length of their cycles may vary. Since we trade the precious metals sector quite often, let’s focus on that sector to see how one cycle leads into another, and how we use them to our advantage.

First, there are daily cycles. Typically, a daily cycle lasts 20-50 days. Occasionally they will be shorter or longer, but under normal trading conditions, this is the length of time we can expect. We use the daily cycles to help us time our entries, and short-term traders may wish to trade them.

Next, we have the intermediate cycle, which is typically 5-7 months in duration. Most intermediate cycles are made up of 4-5 daily cycles. Intermediate cycles are the sweet spot of our investing style here at Wanderer.

Finally, the yearly cycle, which lasts roughly a year, is made up of two intermediate cycles.

Let’s take a look at a chart of gold to see how one complete intermediate cycle looks. Remember, there are 4-5 daily cycles in an intermediate cycle. We marked each one in order from DC#1 to DC#4. If you start at the bottom left of the chart and nod your head up and down as you follow the rise and fall of each cycle, you can begin to anticipate when the next turn should be. It is a visual way of “clapping” to the beat of the music on the chart. Let’s do a quick exercise to see how we use cycles to anticipate price direction.