J.M. Hurst’s Cyclic Theory
In the 1970’s an American engineer called JM Hurst published a theory
about why financial markets move in the way they do. The theory was the
result of many years of research on powerful mainframe computers, and
it became known as Hurst’s Cyclic Theory. Hurst claimed a 90% success
rate trading on the basis of his theory, and yet the theory has remained
largely undiscovered and often misunderstood.
Hurst published two seminal works: a book called The Profit Magic of Stock Transaction Timing, followed a few years later by a workshop-style course which was called the Cyclitec Cycles Course (now available as JM Hurst’s Cycles Course). There are a number of very enthusiastic advocates, prominent traders and writers who proclaim Hurst as the “father of cyclic analysis” and confirm the efficacy of the theory (including the late Brian Millard who wrote several books about Hurst’s theory), but why is it that the theory isn’t better known and more widely used by technical analysts? There are, in my opinion, two reasons:
Hurst published two seminal works: a book called The Profit Magic of Stock Transaction Timing, followed a few years later by a workshop-style course which was called the Cyclitec Cycles Course (now available as JM Hurst’s Cycles Course). There are a number of very enthusiastic advocates, prominent traders and writers who proclaim Hurst as the “father of cyclic analysis” and confirm the efficacy of the theory (including the late Brian Millard who wrote several books about Hurst’s theory), but why is it that the theory isn’t better known and more widely used by technical analysts? There are, in my opinion, two reasons:
- Firstly, Hurst’s Cyclic Theory is not “easy”. While it is beautifully simple and elegant in its essence, it is not a simple theory to understand or to apply. The Cycles Course is over 1,500 pages long, and most people take several months to work through it.
- Secondly, although the theory presented in both the Profit Magic book and the Cycles Course is the same, there is a vitally important distinction between the analysis processes presented in the two. Hurst claimed his success on the basis of the process presented in the Cycles Course, whereas many people read the Profit Magic book and go no further, with the consequence that they never discover the more effective process presented in the Cycles Course.
Hurst defined eight principles which like the axioms of a
mathematical theory provide the definition of his cyclic theory. The
eight Principles of Hurst’s Cyclic Theory are:
- The Principle of Commonality – All equity (or forex or commodity) price movements have many elements in common (in other words similar classes of tradable instruments have price movements with much in common)
- The Principle of Cyclicality – Price movements consist of a combination of specific waves and therefore exhibit cyclic characteristics.
- The Principle of Summation – Price waves which combine to produce the price movement do so by a process of simple addition.
- The Principle of Harmonicity – The wavelengths of neighbouring waves in the collection of cycles contributing to price movement are related by a small integer value.
- The Principle of Synchronicity – Waves in price movement are phased so as to cause simultaneous troughs wherever possible
- The Principle of Proportionality – Waves in price movement have an amplitude that is proportional to their wavelength.
- The Principle of Nominality – A specific, nominal collection of harmonically related waves is common to all price movements.
- The Principle of Variation – The previous four principles represent strong tendencies, from which variation is to be expected.
In essence these principles define a theory which describes the
movement of a financial market as the combination of an infinite number
of “cycles”. These cycles are all harmonically related to one another
(their wavelengths are related by small integer values) and their
troughs are synchronised where possible, as opposed to their peaks. The
principles define exactly how cycles combine to produce a resultant
price movement (with an allowance for some randomness and fundamental
interaction).
Conclusion: These eight simple rules distinguish Hurst’s theory from any other
cyclic theory. For instance most cyclic theories consider cycles in
isolation from each other, and cycles are often seem to “disappear”. By
contrast cycles never disappear according to Hurst’s theory, but they
may be less apparent because of the way in which cycles combine.
It is
the fact that Hurst’s theory stipulates that there are an infinite
number of cycles that makes it particularly different, and also begins
to explain why it is impossible to forecast price movement with 100%
accuracy. Just as it is impossible to conceive of the sum of two
infinite numbers, it is impossible to define the result of combining an
infinite number of cycles (Credits: www.sentienttrader.com - see also HERE & HERE).
The 9-Month Cycle
The most important cycle in my work is the 9-Month Cycle. The 9-Month Cycle goes by other names - the 40-Week Cycle,
the 39-Week Cycle, and the 8.6-Month Cycle, to name the ones I can
think of at the moment. A lot of people follow it, and it is, I have
come to believe, the most important cycle for use in intermediate-term
market forecasting, because it helps us plan for and quickly identify
the most important declines and rallies that we will encounter within
the course of a year. Even if you are a short-term trader, it is
essential that you be aware of the progress of the 9-Month Cycle so that
you will be in tune with next higher trend.
The illustration
above shows the basic structure of the 9-Month Cycle. As you can see, it
consists of two 20-Week Cycles, labeled as "Phase 1" and 'Phase 2".
Likewise, the 20-Week Cycle consists of a Phase 1 and 2 10-Week Cycle.
The
most powerful rally during the 9-Month Cycle will normally occur during
the first three months of the cycle as all three nesting cycles are
combined in a united upward move. Conversely, the period when the market
is most vulnerable to a significant decline is during the last three
months of the cycle when all three cycles are moving downward together
into their final troughs.
In
a bull market the 9-Month Cycle crest normally occurs in the sixth to
eight month in the cycle (right translation), and in a bear market the
crest should be expected in the second or third month of the cycle (left
translation).
In
addition to the cresting of the 9-Month Cycle, the next most
significant event is the cresting and completion of the Phase 1 20-Week
Cycle. This can materialize as a minor price correction or consolidation
in a bull market, but in a bear market it will likely coincide with the
cresting of the 9-Month Cycle.
Knowing this basic 9-Month Cycle
structure, we can consider that we are at the least risk establishing
new long positions during the first three months of the cycle, and the
greatest risk of decline comes in the last three months of the cycle.
The three months in the middle is a time when caution should be
exercised - it can present risk as the Phase 1 20-Week Cycle rolls over
into a trough, and it also can present new opportunity as the Phase 2
20-Week Cycle begins to move up.