Profitable Trading with Market Cycles

Cycles are prevalent in all aspects of life. They range from the very short term, like the life cycle of a June bug, which lives only a few days, to the life cycle of a planet, which takes billions of years.

In trading, there are important to recognize the Market Cycles. They go up, peak, go down and bottom. When one cycle is finished, the next begins.

The problem is that most investors and traders either fail to recognize that markets are cyclical or forget to expect the end of the current market phase.

Another significant challenge is that, even when you accept the existence of cycles, it is nearly impossible to pick the top or bottom of one. But an understanding of cycles is essential if you want to maximize investment or trading returns.



Here are the four major components of a market cycle and how you can recognize them:

Stage I: Accumulation
Market has Bottomed – someone is buying ( experienced traders, value investors and smart Money Managers ).
General market sentiment is still bearish.
The market emotion is doom and gloom.
Price go flat.Sentiment switches from Negative to Neutral.

Stage II: Mark-Up (Trending)
The market has been stable and is beginning to move higher.
The early buyer includes technical traders, breakout traders, pattern traders and momentum traders.
They recognize that the market direction and sentiment have changed.
Near End of Trending Phase;
o Late majority jump in
o Market volumes up substantially
o Prices climb fast.
o Smart Money getting out

Stage III: Distribution (Topping)
Sellers begin to dominate.
Bullish sentiment has changed to mixed sentiment.
Classic Patterns may appear like double and triple top, as well as head and shoulders top patterns.

Stage IV: Mark-Down ( Decline )
The most painful for those who still hold positions.
Hanging on to losers.
Down 50% or so.

Although not always obvious, cycles exist in all markets. For the smart money, the accumulation phase is the time to buy since values have stopped falling and everyone else is still bearish. These types of investors are also called contrarians since they are going against the common market sentiment at the time.

These same folks sell as markets enter the final stage of mark-up, which is known as the parabolic or buying climax. This is when values are climbing fastest and sentiment is most bullish, which means the market is getting ready to reverse.Smart investors who recognize the different parts of a market cycle are more able to take advantage of them to profit. They are also less likely to get fooled into buying at the worst possible time.





Recomended Time Frame



Source: FXSIFU