Advanced cycle trading: DPO, Schaff Trend Cycle, and visual forecasting tools

Market cycles are a fundamental, repeating pattern in financial markets, driven by a complex interaction of psychological extremes, macroeconomic forces, and temporal overlaps. In part one, we provided an overview of three key frameworks: the Wyckoff model, which maps the four phases of market and collective investor psychology (accumulation, mark-up, distribution, and mark-down); the business (economic) cycle, which tracks shifts in GDP, interest rates, and employment through expansion, peak, contraction, and trough; and Hurst cycle analysis, which posits that price action is a sum of multiple predictable, overlapping cycles. While understanding these conceptual models is essential for disciplined trading, the next step is to examine the practical methods for identification. This second part of our series will now focus on the specific technical indicators and tools used to measure, identify, and trade these cyclical movements in real-time.

The Detrended Price Oscillator (DPO) is a unique tool that strips away the "noise" of long-term trends to isolate the underlying cyclical rhythms of an asset. Unlike momentum oscillators such as the RSI or MACD, which focus on current price strength, the DPO is specifically designed to help us identify peaks, troughs, and the typical duration of price cycles. It’s achieved by comparing a historical closing price (shifted back to the middle of a look-back period) to a Simple Moving Average, effectively "centring" the indicator so it doesn't react to the most recent price action. This backward shift means the DPO is not a lagging trend-follower, but rather a diagnostic tool; by counting the intervals between its crests and valleys, traders can estimate when the next cycle turn might occur. While it is less effective in strongly trending markets, its value lies in pinpointing overbought or oversold extremes within a range and providing a clear, "detrended" view of market cadence.

This hourly EUR/USD chart illustrates a specialised technical approach that combines cycle timing with momentum analysis. The Detrended Price Oscillator (DPO) acts as a "cycle lens," stripping away the primary trend to reveal the market’s underlying rhythm, which allows traders to identify consistent intervals between peaks and troughs. Meanwhile, the Relative Strength Index (RSI) serves as a momentum "speedometer," measuring the speed and change of price movements to flag overextended conditions. When these indicators align — such as a DPO peak coinciding with an RSI reading above 70, it provides a high-confluence signal that the current cycle may be reaching an extreme and a reversal may be imminent.

The Schaff Trend Cycle (STC) is a hybrid technical indicator developed by Doug Schaff that combines the trend-following capabilities of the Moving Average Convergence Divergence (MACD) with the cyclical responsiveness of a stochastic oscillator. Designed to provide more accurate and timely signals than traditional oscillators, it helps identify market trends and potential reversals by measuring price cycles rather than just momentum. The STC ranges from 0 to 100, with values above 75 indicating overbought conditions and values below 25 suggesting the market is oversold. Unlike the standard MACD, which can be prone to “noise” and false signals, the STC uses a double-smoothed stochastic calculation to filter out minor price fluctuations, resulting in a smoother line that reacts more quickly to significant trend shifts.

• MACD foundation: It starts by calculating the difference between two exponential moving averages (typically 23 and 50 periods) to determine the basic trend.
• Cyclical smoothing: A 10-period stochastic oscillator is then applied to these MACD values to isolate recurring market cycles and remove “lag”.
• Buy/sell signals: Traders typically look for a “U-turn” or crossover; for example, a buy signal occurs when the indicator crosses above the 25 level, while a sell signal is triggered when it falls below the 75 level.
• Mid-point bias: A reading above 50 generally confirms a bullish trend bias, whereas a reading below 50 indicates a bearish bias.

This chart provides a direct visual comparison between the Schaff Trend Cycle (STC) and the Moving Average Convergence Divergence (MACD) on a 1-hour EUR/USD timeframe.

The STC is a hybrid indicator that improves on the MACD by adding a cyclical component based on stochastics.

• Oscillation range: Unlike the MACD, which is unbounded, the STC oscillates on a fixed scale from 0 to 100.
• Overbought/oversold zones: The green shaded areas (above 75) represent overbought conditions, while red shaded areas (below 25) represent oversold conditions.
• Faster response: Notice how the STC reaches extreme levels and turns more quickly than the MACD lines below it. This allows it to act as an early warning system for trend reversals.
• Signal dots: The green dots on the STC line represent bullish entries (crossing above 25), while red dots signal bearish entries (crossing below 75).

The standard MACD (12, 26, 9) is used here to illustrate the “foundation” on which the STC is built.

• Trend confirmation: The MACD is slower and more prone to lag than the STC. It is often used to confirm the broader trend that the STC is attempting to time.
• Histogram: The vertical bars (histogram) represent the distance between the MACD line and its signal line, showing the current strength of momentum.

These tools allow traders to manually overlay cyclical structures onto a price chart to predict future dates of interest.

• Time cycles: An analytical drawing tool used to identify repeating high and low patterns. It places equidistant vertical lines on the chart based on a user-defined interval.
• Cyclic lines: Similar to time cycles, this tool sets two initial vertical lines a specific distance apart; the software then generates repeating lines at that same interval indefinitely into the future.
• Sine line: A drawing tool that uses a wave pattern (sine wave) to visualise the rise and fall of price cycles, helping to highlight the "crest" and "trough" of market movement.
• Fibonacci time zones: Unlike regular time cycles that use equal distances, this tool uses the Fibonacci sequence (1, 2, 3, 5, 8, 13, etc.) to determine the horizontal distance between vertical lines, helping identify potential future trend reversal dates.

This chart of the Euro/US dollar (EUR/USD) on a weekly timeframe illustrates a complex "market timing" strategy that combines price cycles, geopolitical events, and Fibonacci analysis in an attempt to forecast future turning points.

The vertical blue lines represent the dates of US presidential elections. Historically, these elections are significant cyclical markers because they introduce policy shifts that impact market volatility.

• Historical pattern: Notice how major market lows often occur within two years after an election. For example, the 2016 and 2020 elections (labelled on the chart) preceded significant shifts in the EUR/USD trend, with a notable trough forming in late 2022 as the market adjusted to the post-2020 political and economic landscape.

The overlapping blue and green arcs at the bottom of the chart are sine waves, used to visualise the market's rhythmic "ebb and flow".

• Cycle confluence (red circles): The red circles highlight "confluence" points where the short-term cycle (blue) and long-term cycle (green) align at a trough. These points frequently coincide with major price reversals, such as the bottom in late 2022.
• Projections: By extending these waves into the future, a trader can estimate when the next major "low" might occur (e.g., projected into late 2027/2028).

The colourful horizontal dashed lines represent Fibonacci levels (0 to 1), anchored from the 2021 high to the 2022 low.

• Resistance zones: Price is currently interacting with the 0.5 (1.0728) and 0.382 (1.0977) levels. These act as "temporal resistance," where the price may pause or reverse during its recovery.
• The "Golden ratio": The 0.618 (1.0478) level is particularly significant; as long as the price stays above this deeper retracement, the recovery from the 2022 low is considered technically "healthy".

Some analysis frameworks look for cycles that repeat based on fixed timeframes or major macroeconomic drivers, rather than pure price patterns. These cycles are generally grouped by their duration:

• Kitchin cycle: Driven by fluctuations in business inventories, leading to short-term peaks and troughs in economic activity.

• Juglar cycle (standard business cycle): The most common medium-term cycle (7–11 years), driven by fluctuations in fixed capital investment (machinery, equipment).
• Kuznets cycle: A longer medium-term cycle (15–25 years), driven primarily by central building and infrastructure investment.

• Secular cycles: Massive, multi-decade trends lasting 10–25 years, driven by significant structural changes in the economy, such as technology booms (e.g., the "dot-com" boom) or post-war expansions.
• Kondratiev (K-waves): The longest known economic cycle (45–60 years), driven by major, discontinuous technological revolutions (e.g., the steam engine, the internet, or AI).

Patterns that repeat based on the calendar year, such as the "January effect" (stocks tend to rise in January) or the adage "sell in May and go away."

In conclusion, understanding market cycles is paramount for navigating the financial landscape with a clear strategy, rather than being swept away by market currents. While technical models like the Wyckoff cycle provide a structural framework that reflects the extremes of collective human psychology, the business (economic) cycle offers a crucial, macro-level perspective driven by fundamentals like GDP and interest rates. The key takeaway is that these cycles — psychological, technical, and economic — do not operate in isolation; they intersect and influence each other across different timeframes. For the modern trader, success lies in retrospectively identifying these patterns and appreciating the complex, multi-layered nature of market movement to make more informed decisions through every phase of expansion and contraction.