Try to look at price behavior for quite some time. Eventually, you will clearly see that the charts are cyclical. Charts are constantly moving around patterns that you could use to predict future price action. If you learn to understand the phases of any cycle, you will increase your chances of making a profit.
How It Works
Have you paid attention that the chart always moves up or down, forming peculiar waves or swings? These waves are market cycles. They may differ from each other but each of them first grows and after the peak begins to decline until it falls to the bottom. The end of one cycle turns into the beginning of the next one.
It is almost impossible to catch the peak or the beginning of a cycle. However, the ability to determine a current market stage can be one of the decisive factors for your success.
Duration of Market Cycles
Whatever timeframe you choose, the chart will still move in waves. It happens this way as the cycles have different duration and large cycles consist of smaller ones.
- Scalpers and intraday traders use cycles that last from a few minutes to several hours. During the day, you can witness 4 or even more cycles.
- Some cycles take several weeks or months.
- There is a 4-years long presidential cycle. As a rule, in the first half of the presidential term, there is an economic recession. Growth is observed during the second 2 years when a candidate prepares for re-election. The president is trying to maximize the level of the economy which has a good effect on exchange rates. If there is no growth in the second half it is likely that the president will not be re-elected.
- Long-term and positional traders prefer cycles that last for a few years or decades. Certain types of investors, for example, real estate investors, trade in cycles with a duration of up to 20 years.
- There are also supercycles, such as the Kondratiev wave or the Elliott wave with a duration of about 60 years.
4 Stages of Any Cycle
We already know that each cycle goes through the same states. Let's take a look at each of these loops separately.
Accumulation
The first phase of any cycle begins when the previous one ends. At this moment, the market falls as low as possible and soon you can expect a sharp price reversal. This is the best time to open buy trades.
Unfortunately, catching such a moment is very difficult. The best option would be news tracking. At this time, bears have maximum activity and experienced traders, such as corporate and undervalued assets investors begin to buy up at the lowest prices.
Due to such buys, the bearish momentum begins to weaken. It gets more and more difficult for the price to form lower lows and highs. The market starts to form such figures as double and triple bottom or head and shoulders patterns. This should serve as your main signal of an imminent market reversal.
Mark-Up
After the accumulation phase, the mood in the market begins to change. The price starts to form higher highs and lows and the trend becomes upward. This stage is much easier to determine than the previous one. A huge number of bulls come into play and push the prices higher.
By the end of the phase, the market begins to correct. At this moment, the late bulls try to pull the maximum out of the uptrend. The long-term traders use this event to exit their long positions during the last push.
In this market phase, the trend is the most pronounced. Use it for trend trading. Long-term traders use the entire phase while short-term traders buy immediately after the formation of a higher low.
Distribution
Finally, the uptrend is weakening and higher highs and lows stop to form. Time for a distribution phase. The number of bulls and bears on the market is equal and the price is losing a clear direction.
As with the accumulation phase, search the charts for the relevant patterns, such as double and triple tops or head and shoulders. They suggest an imminent reversal of the market. Long-term investors need to take their profits. Soon bears will enter the game.
Mark-down
Market sentiment is starting to change. Prices are falling which forces traders to sell and this leads to strong bearish pressure. The charts begin to form lower highs and lows.
This phase is the perfect period for trend trading. If you are a short-term trader open a sell position right after a higher high. Or open a long-term position in the beginning of the cycle and wait for the accumulation phase to close it.
To Summarize
Please, don’t ignore the market cycles. Understanding their behavior will give you an absolute superiority over other inexperienced traders. Would be great to catch the moments when the quotes are at the top and bottom phases. To do this, track the formation of the corresponding signals such as head and shoulders pattern or double and triple bottoms or tops.
Don’t worry if you failed to catch the ideal moment. You still can make some good money on a clear upward or downward trend in the corresponding phase. Understanding of the cycles will help you feel the market. This is your path to success.