Adaptive Cyber Cycle – Rules, Settings, Strategy, Performance, Returns

Frequently adjusting your trading indicator to suit the ever-changing conditions of financial markets can be a daunting task, even for seasoned traders, which is why adaptive indicators, like the Adaptive Cyber Cycle, can be a game changer. What do you know about this indicator?

The Adaptive Cyber Cycle indicator is a self-adjusting technical indicator that automatically adapts to the frequently changing market cycles of any financial instrument. Developed by John Ehlers, the indicator is an improvement on the Cyber Cycle Indicator introduced earlier by the same author, which helps in isolating the cycle component of the price time series from its trend counterpart. The Adaptive Cyber Cycle uses dynamic cycle period inputs rather than the static setting in the ordinary Cyber Cycle indicator.

In this post, we will take a look at most of the questions you may have about the Adaptive Cyber Cycle indicator: what it is, how it works, and how you can use it to improve your trading strategies. Let’s dive in!

Key takeaways

• The Adaptive Cyber Cycle Indicator is a self-adjusting technical tool designed to adapt to changing market cycles.
• Created by John Ehlers as an improvement on his earlier Cyber Cycle Indicator, which isolates price cycles from trends.
• Comparison to Conventional Oscillators: Tracks price swing waves with variable amplitude, unlike fixed-amplitude oscillators like RSI.
• Dynamic Adjustments: Uses dynamic cycle period inputs to automatically adapt to market conditions, unlike the static settings of the ordinary Cyber Cycle indicator.
• Self-Tuning Feature: Recursively adjusts period settings using the dominant cycle period, eliminating the need for manual adjustments.
• Signal Characteristics: Waves vary in size but still indicate price swing changes. Signals are color-coded, often green for bullish swings and red for bearish swings, depending on color preferences.
• We show you a complete Adaptive Cyber Cycle trading strategy complete with trading rules.
• If you want to look at other indicators, please read our take on the top 10 trading indicators.

What is the Adaptive Cyber Cycle indicator?

The Adaptive Cyber Cycle indicator is a self-adjusting technical indicator that can adapt to the constantly changing market cycles of a financial instrument. Developed by John Ehlers, the indicator is an improvement on the Cyber Cycle Indicator introduced earlier by the same author, which helps in isolating the cycle component of the price time series from its trend counterpart.

As with conventional oscillators, cyber cycle indicators track the waves of price swings as the price moves in whichever direction it is trending — up, down, or sideways. But the waves in cyber cycle indicators have variable amplitude, unlike what is seen in other oscillators like the RSI. Then, the Adaptive Cyber Cycle uses dynamic cycle period inputs, rather than the static setting used in the ordinary Cyber Cycle indicator, to make the indicator automatically adjust to changing market conditions.

Thus, while traditional oscillators and the cyber cycle indicator need periodic adjustments of the period settings to stay tuned to the current market condition, the Adaptive Cyber Cycle indicator recursively adjusts to the predominant market condition on its own. It achieves this by using the dominant cycle period as the length in computing the alpha.

The indicator’s signal is not like those of other oscillators, as the waves can vary in size while still indicating a change in the price swing. As such, the signals are color-coded. Green often signals a bullish swing, and red signals a bearish swing — but this depends on the color choice.

Below (lower pane) is an example of what the indicator might look like (the red line is the trigger line):

Adaptive Cyber Cycle trading strategy – rules, backtest, returns, and performance

Let’s backtest an Adaptive Cycber Cycle trading strategy complete with trading rules.

We make the following trading rules:

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Below is the equity curve for Bitcoin from 2014 until today:

Trading statistics, returns, and performance (including commissions and slippage):

• Number of trades: 179
• Average gain per trade: 1.5%
• Annual returns (CAGR): 25%
• Win rate: 77%
• Time spent in the market: 16%
• Risk-adjusted return: 148%
• Max drawdown: 39%

This is the code we used for the backtest (Amibroker):

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How does the Adaptive Cyber Cycle work in trading?

In trading, the Adaptive Cyber Cycle works as an oscillator that shows the market cycle by tracking the up and down price waves as the price trends in whatever direction.

However, unlike conventional oscillators, the adaptive cyber cycle needs no periodic adjustments to suit the current market condition as it adjusts to the market cycles on its own — in other words, it is “adaptive”.

The indicator achieves this adaptive function by using dynamic cycle period inputs instead of static settings in its calculation — the dominant cycle period is used as the length in computing the alpha. As a result, it is more responsive than the non-adaptive version, with the buy and sell signals often occurring one bar earlier than that of the non-adaptive version.

The signals are usually color-coded, with green often signaling a bullish price swing and red signaling a bearish price swing. However, the color coding will depend on the user’s color choice.

Who developed the Adaptive Cyber Cycle indicator?

The Adaptive Cyber Cycle indicator was developed by John Ehlers, a renowned technical analyst, who first described the indicator in the article titled: “Using The Fisher Transform”, which was published in the November 2002 issue of the “Technical Analysis Of Stock & Commodities” magazine.

Ehlers created the Adaptive Cyber Cycle as an improvement on the Cyber Cycle he introduced earlier. The adaptive version uses dynamic cycle period inputs, rather than the static setting, to make the indicator automatically adjust to changing market conditions, which makes it more responsive than the non-adaptive version.

Why use the Adaptive Cyber Cycle for trading?

There are many reasons to use the Adaptive Cyber Cycle for trading. One of them is that the indicator can help you to track and trade individual price swings, as the market moves in whatever direction it is trending. This is often the strategy for swing traders and mean-reversion traders who aim to capture the individual price swings in a trend.

However, the main reason is that the indicator is adaptive in nature. That is, it automatically adjusts its settings to suit the predominant market condition. Thus, in a slowly moving market, the indicator waves become slower but in a fast market, the indicator waves get faster.

How do you calculate the Adaptive Cyber Cycle?

How to calculate the Adaptive Cyber Cycle is quite complex, and the interesting thing is that you don’t have to do the calculation yourself, as your trading platform will do it and plot the indicator for you. Nonetheless, here are the steps for calculating the Adaptive Cyber Cycle:

• Smoothen the data using a four-bar symmetrical Finite Impulse Response Filter and get the value for the index period length
• Compute the Cyber Cycle for index length
• Compute the Dominant Cycle Period for the Cyber Cycle — this is what gives the indicator its adaptive nature, as the period is not static, but rather, changes with changing market conditions
• Compute the Adaptive Cyber Cycle

What markets can the Adaptive Cyber Cycle be applied to?

The Adaptive Cyber Cycle can be applied to any market that posts price data at regular intervals. Since it only uses the price data, the indicator can be applied to all financial markets.

This is unlike volume-based indicators, which cannot be used in markets that don’t have reliable volume data, such as the spot forex market. The Adaptive Cyber Cycle can be used in any market, including stocks, commodities, forex, and so on, as long as you have access to the price data of that market.

How is the Adaptive Cyber Cycle different from other indicators?

The Adaptive Cyber Cycle is different from other indicators in that it can auto-adjust its cycle period to suit the condition of the market it is applied. It does this by using dynamic cycle period inputs, rather than a static setting as in other indicators.

As a result, while other indicators need you to periodically adjust their period settings, especially when the market condition changes, so as to stay tuned to the changing market cycle, the Adaptive Cyber Cycle indicator recursively adjusts its period setting to suit the predominant market condition.

What are the benefits of using the Adaptive Cyber Cycle?

The benefits of using the Adaptive Cyber Cycle are many. These are some of them:

• The indicator helps to track the individual price waves within the trend
• It is adaptive, which means you don’t need to adjust the settings when the market condition changes, as it does that on its own.
• It can be used to generate buy and sell signals in the right market condition for your strategy

How do you interpret the Adaptive Cyber Cycle signals?

To interpret the Adaptive Cyber Cycle signals, you need to understand how the indicator works, the structure and phase of the market, and the direction of the trend.

The indicator tracks the individual price waves within a trend — both the ones moving in the direction of the trend and the countertrend swings. While mean-reversion traders may consider both swings, it is best to focus on the price swings in the trend direction, as they are usually bigger and offer higher probability trades.

In many trading platforms, the indicator’s signals are color-coded for easy visualization. The green color often suggests a buy signal, while the red color indicates a sell signal. However, this must be taken only in the direction of the trend, unless you are a seasoned mean-reversion trader who knows what he’s doing.

Thus, in an uptrend, you look for buy signals only, and in a downtrend, look for sell signals only. In a sideways market, you may use both signals if possible.

What settings are recommended for the Adaptive Cyber Cycle?

The settings recommended for the Adaptive Cyber Cycle are just the price source and the Alpha value you want the indicator to use, as you can see in the chart below.

Being an adaptive indicator, it auto-adjusts its period setting to suit the current market cycle so you don’t have to do that manually. The period setting option is not even included in the indicator box above, as the indicator uses a period that suits the market condition at any point in time.

How does the Adaptive Cyber Cycle respond to market changes?

The Adaptive Cyber Cycle responds to market changes by adjusting its cycle period to a value that suits the current market condition. It does this using dynamic cycle period inputs, rather than the static setting, to automatically adjust to changing market conditions.

That is, it uses the dominant cycle period as the length in computing the alpha such that when the market is moving slowly, the cycle period is prolonged and when the market is moving faster, the cycle period is shorter.

Can the Adaptive Cyber Cycle be used for day trading?

Yes, the Adaptive Cyber Cycle can be used for day trading if used with the right trading strategy and applied to a timeframe suitable for day trading. The common day trading timeframes are the hourly, 30-minute, 15-minute, 10-minute, and 5-minute timeframes.

With a robust trading strategy that has an edge on any of these intraday timeframes, you can effectively use the Adaptive Cyber Cycle for day trading. The key is creating a reliable strategy with the indicator that works on an intraday timeframe for day trading.

What timeframes work best with the Adaptive Cyber Cycle?

The timeframes that work best with the Adaptive Cyber Cycle will depend on your trading style and the result of your backtesting.

Depending on the trading style you choose, you can either trade on big timeframes like the daily or 4-hour timeframe if you are a swing trader, or the intraday timeframes, such as the 30-minute, 15-minute, or 10-minute timeframe if you are a day trader. You have to backtest the different timeframes for your trading style to find out the one that works best.

How do you combine the Adaptive Cyber Cycle with other indicators?

To combine the Adaptive Cyber Cycle with other indicators, you have to know how the indicator works so you will know the indicators that can complement it. Since it is a cycle indicator (aka, an oscillator), it is better to combine it with trend indicators that can show you the direction of the trend.

So, a good indicator you can combine with the Adaptive Cyber Cycle is the moving average. You use the moving average to identify the direction of the trend and then use the cycle indicator to track and trade individual price swings in the trend direction.

What trading strategies use the Adaptive Cyber Cycle?

Some of the trading strategies that can use the Adaptive Cyber Cycle include:

• Trend-continuation swing trades: These are trade setups that form in the direction of the trend after a pullback. Since the Adaptive Cyber Cycle tracks the individual price swings, it can be used to know when a pullback has reversed to begin the next impulse swing in the trend direction.
• Mean-reversion trades: These are trades that aim to play the price movement back to its mean after it has significantly traded away from it. They work best in sideways markets where you can trade in either direction following the up and down waves Of the indicator at key price levels.

How do you optimize the Adaptive Cyber Cycle parameters?

Generally, you don’t optimize the Adaptive Cyber Cycle parameters, as the indicator is adaptive and, as such, can adjust its period setting to suit the prevailing market condition. However, you may change the price source to whatever price data offers you the best performance. One way to know that is through backtesting. You may also change the alpha settings for a better display of the indicator waves.

What are the limitations of the Adaptive Cyber Cycle?

The limitations of the Adaptive Cyber Cycle are as follows:

• The indicator does not show you the direction of the main trend
• It cannot be used as a standalone trading strategy
• It is prone to false signals if not combined with other indicators or other forms of analysis to formulate a reliable trading strategy
• It may not be suitable for trend-following long-term trading

How does the Adaptive Cyber Cycle identify trends?

The Adaptive Cyber Cycle does not identify trends, as it is a market cycle indicator, which means that it tracks the individual price swings that make up the market cycles within the overall trend. However, since price swings on higher timeframes can become trends on lower timeframes, the Adaptive Cyber Cycle may be able to identify trends using multi-timeframe analysis.

The price swings it identifies on a higher timeframe, such as the daily timeframe, will become a trend on a lower timeframe, such as the hourly or 30-minute timeframe.

How do you avoid false signals with the Adaptive Cyber Cycle?

To avoid false signals with the Adaptive Cyber Cycle, you have to combine it with other indicators or other forms of analysis, especially ones that show the trend direction. The frequency of false signals reduces if you only choose the signals in the trend direction.

Since the indicator does not usually identify the direction of the main trend, you may combine it with a trend indicator, such as the moving average.

What are common mistakes when using the Adaptive Cyber Cycle?

The common mistakes when using the Adaptive Cyber Cycle include:

• Not having a trading strategy with clear entry and exit criteria
• Using the indicator without first identifying the trend direction
• Using the indicator as a standalone trading strategy
• Trading without having a risk management plan

How do you backtest the Adaptive Cyber Cycle strategy?

To backtest the Adaptive Cyber Cycle strategy, follow these steps:

1. Identify and study the markets you want to backest your Adaptive Cyber Cycle strategy.
2. Formulate the strategy you want to backtest and the parameters or timeframes you need to test.
3. Gather the historical data you need for the backtesting and divide the data into in-sample and out-of-sample data.
4. Convert the strategy into a trading algorithm.
5. Run your backtesting on the in-sample data and optimize with the out-of-sample data, adjusting your parameters as needed.
6. Evaluate the results of your backtesting.

Can beginners use the Adaptive Cyber Cycle effectively?

Yes, beginners can use the Adaptive Cyber Cycle effectively if they learn how the indicator works and formulate suitable strategies they can practice. They can start by studying resource materials on the indicator, like the one they are reading now. Then, they should open a demo account and practice a simple strategy using the indicator. This way, they will learn how the indicator interacts with the price action.

How does the Adaptive Cyber Cycle handle market noise?

The Adaptive Cyber Cycle handles market noise by adjusting its period setting to suit the market condition. When the price movement is slower, the indicator waves get slower and bigger if the movement is sustained in one direction.

When the price movement is more frequent, the indicator waves become faster and smaller if the price movement is zigzagging.

What is the history behind the Adaptive Cyber Cycle?

The history behind the Adaptive Cyber Cycle began in 2001 when John Ehlers published the first edition of “Rocket Science for Traders”, where he explained the Cyber Cycle Indicator for the first time.

Then, in 2002, he improved on the Cyber Cycle Indicator to create the Adaptive Cyber Cycle indicator and introduced it to the trading public in an article titled, “Using The Fisher Transform”, in the November 2002 issue of the “Technical Analysis Of Stock & Commodities” magazine. He further explained both indicators in his 2004 book, “Сybernetic Analysis for Stock and Futures”.

How can the Adaptive Cyber Cycle improve trading performance?

The Adaptive Cyber Cycle can improve trading performance by tracking the individual price swings, showing when a pullback is likely emerging so swing traders can close their positions and lock in their profits. It can also show precise entry points for swing trades.