There are four major market cycles. Knowing these major market cycles is important for you and your trading system. Each market cycle requires a different approach from your trading system. Adapting to market cycles can improve your bottom line.
Lets discuss these market cycles now. The four major market cycles are: 1) Trending, 2) Consolidating, 3) Breaking out of a consolidation and 4) Corrective.
Trending is when the market starts to move consistently in one direction either up or down. An uptrend means each higher high is higher than the previous high and each lower low is also higher from the previous low. Similarly for the down trend!
On a chart, a Consolidation market will look like a sideways horizontal line. Consolidating is when the market is struck between two horizontal support and resistance levels.
Now what is breaking out of a Consolidation? After the market has been consolidation for at least 20 bars Breaking out of a Consolidation is when there is a sharp increase or decrease in the price.
Corrective is a short sharp reverse in prices during a longer market trend. Many traders also use Elliott Wave Theory to determine waves which are also an indication of market cycles In addition to these four market cycles.
There are five Elliott waves and each one has its own relevance in determining the trading strategy. However, using Elliott Waves is somewhat advanced for most traders. You need to have a thorough understanding and ability to correctly determine which wave the market is in at that point.
You need to learn how to correctly a market cycle. For example suppose the market is only in consolidation and you incorrectly determine that the market has entered a trend. Incorrectly identifying the market with either the four market cycles or by using the Elliot Waves can be a costly mistake.
Your best plan of action should be constant observation. You might enter a trend trade and get immediately stopped out. Market experience is the best teacher and only overtime you will be able to correctly figure out the market cycle.
Hindsight is always perfect but trying to predict the markets can be an elusive and impossible endeavor. Right side of the chart is always an unknown quantity for the trader until it reveals itself.
Just as there are four seasons in a year, the markets have four cycles. So in addition to having a trading system, you need to learn what the different market cycles are. That means you should develop the skill of correctly identifying the different market cycles at the right time.
You need to learn how to adopt your approach to those cycles to remain profitable. For example in a choppy, sideways bracketed market, you need to adopt your system and rules so that you do not get whip sawed and stopped out a lot. Effectively identifying the market cycles is a skill that all successful traders have mastered.
Author Resource:
Mr. Ahmad Hassam is a Harvard University Graduate. Learn These Candlestick Patterns . Try These 1500 Pips A Day Forex Signals from heaven!
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