Traders approach the market analysis of currency pairs from several points of view.
What is your approach?
One key point of view in the approach is to establish what market cycle a forex currency pair is in at any moment.
We’ll review each market cycle and share potential opportunities to help you link your analysis and strategies to highly probable setups.
In this post, we’ll expound on four market cycles. The approach of each class derives from moving averages.
Importance of Knowing a Market Cycle
The knowledge of a market cycle helps a trader to anticipate certain movements with price action.
According to Rayner Teo, in his Book: Price Action Trading Secrets, probing for the market cycle is “..like taking an X-ray vision of what the market is really doing.”
Each market cycle is synonymous with distinct price directions. Therefore, it helps build insight for a trader to spot where it’s best for them to ride a trend and exit towards its end.
Of course, the analysis here builds into the confidence of a trader. And at no point should one trade without taking on the risk measures to protect trading accounts.
Note: Some traders and analysts refer to a market cycle as a market stage
Market Cycle Technical Analysis Using Moving Averages
Moving averages are a helpful way for traders to analyze the markets. The good thing is that MA indicators are easy to customize on most trading software, and it extends across all timeframes.
Four Market Cycles or stages for a Currency Pair
A Forex currency pair follows four distinct cycles or stages.
In the next part of the post, we’ll go over each cycle. More specifically, we’ll highlight the key characteristics of each.
1. Accumulation Stage
A market hits the accumulation stage after a heavy downtrend. The prices are too low in support zones or demand zones.
The forces colliding here in a state of equilibrium are:
- Sellers take profits and exit the market at low prices.
- Buyers step in to buy at low prices.
Logically, with time, sellers reduce, and the state of equilibrium breaks as buyers increase.
And with increased buying, the demand begins to pick up again. This is the reason prices keep increasing into the subsequent timeframes.
And with low prices, buyers begin to step in – demand for currency pairs or assert picks up.
The main reason it’s called the accumulation stage derives from what happens therein. Buyers buy low, with the anticipation that prices will rise in the future.
Key Characteristics of the market accumulation stage
- This stage arises after prices drop consistently for several months on a daily timeframe
- The market takes a ranging or sideways trading fashion – with clear areas of support and resistance.
- The SMA 200 flattens out, and the price swings around it – back and forth.
The fact that prices are low does not rule out further breaks into lower support zones.
While looking for opportunities, traders should allow the prices to break the resistance before joining into uptrend opportunities.
2. Advancing Stage
At some point, prices break resistance from the accumulation stage and get into the Advancing stage.
The reality is prices cannot range forever. And in this case, the buying pressure is able to overcome that of sellers. The market now forms a consistent uptrend.
Key Characteristics of the market advancing stage
- Prices must break past the resistance from the accumulating stage
- Consistent uptrend comprising of higher highs and higher lows
- Prices are in a range above the SMA 200
- SMA 200 changes angles and points higher
3. Distribution Stage
Markets get into the distribution stages after buyers are in control consistently. It comes after prices maintain higher highs through the advancing stages.
By appearance, at the distribution stages, prices maintain a choppy or raging fashion. The ranging arises due to the market equilibriums – sellers shorting at high prices while buyers exit the markets.
The name distribution stage arises from the fact that smart buyers exit with anticipation that prices will fall lower with time.
Of course, sellers garner interest within the zones of market supply.
Key Characteristics of the market Distribution stage
- Markets hit the distribution stage after rising consistently on a daily basis for several months
- Prices range within a distinct zone within an uptrend channel with a support and resistance region
- The SMA 200 starts to fall flat from its steep angles, and the prices loop back and forth around it
There’s no sure guarantee that the markets will break down to zones with lower prices. Traders must hold on patiently.
4. Declining Stage
Markets come into a declining stage after breaking the support from the former – distribution stage.
Since the ranging fashion cannot sustain forever, sellers take control of the markets into a clear downtrend. They overcome the buyers to set the prices, getting lower lows and highs.
Key Characteristics of the market Declining stage
- Declining stages occur after prices break away past the support within the distribution stages.
- Sustained downtrend with lower lows
- Priceline fall below the SMA 200
- SMA200 takes angles point lower on a daily time frame
Trading Inference with respect to market cycles analysis
Once a trader is able to know the specific stage a currency pair is in – from the above four stages, you know where to join.
The best way to approach the stages is to work with the main approach – buy low and sell high.
While the approach here can help scalpers and day traders, it definitely fits long-term traders.
And it’s a cool way to analyze markets for trading longer timeframes.
Imagine riding an upswing once it breaks from accumulation all the way to distribution. It’s a fashion that calls for confidence and patience at the same time.
Of course, the four cycles or stages here are from the point of theory. Markets display random fashion, in reality, every now and then.
So, it’s important to stay out of the markets if the indicators are not clear- you must protect and not risk your capital.
The beauty is that there are many opportunities with the arrays of assets and currency pairs trading across markets. In fact, cryptocurrency markets run all through weekdays and weekends.
Other Market Cycles
It’s helpful to mention that markets must not follow the four stages we pointed out above.
And in light of that, here are two more cycles that traders can explore.
Black Swans are a collective term for unforeseen stuff that drives prices in unimaginable ways.
They include wars, calamities, and anything that affects the demand and supply of goods and services. One good example here is the COVID-19 pandemic. And the next is the war between Russia and Ukraine.
It’s upon traders to figure out survival measures – mostly, it falls back to good risk management.
Black swans can victimize large institutions – banks and brokers included. However, the focal point is for traders to figure out the disruptions and how they can benefit from the massive movements in prices – safely.
The Presidential Cycle
The presidential cycle plays a clear role in the world’s largest economy – the United States of America.
According to the four-year cycle, two first years are met with laxity of promises to the electorate. But the last two years find administrators pushing hard to satisfy the promises of a sitting president.
Of course, the president seeks to deliver and seeks re-election for a second term—by showing promised results.
One observable cycle appears within the prevailing interest rates. Most presidents in the USA always lower interest rates every election year. And by extension, interest rates have a huge bearing on the overall performance of other currency pairs.
On a specific note, low-interest rates trigger higher expenditures and better performance in stock markets.
Market stages or cycles are one insightful way to analyze markets. Much more goes into converting the cycles into winning trades or investments.
Past the analysis, next is the requirement to work with proven strategies and correct risk and money management techniques.
Market Cycles – Frequently Asked Questions
What are the 4 market cycles?
The four market cycles are:
- Markup or Ascent or Advance
- Markdown or Descent or Declining
What is a market cycle in forex?
A market cycle in forex is a phase of theoretically predictable price movements with respect to the prices and specific moving averages.
How do you analyze a market cycle?
Analyzing a market cycle starts with identifying a specific cycle. Next, traders work with probable high setups with proven strategies.
How do you trade the market cycle?
Trading a market cycle narrows down to working with proven strategies. It works best by confirming signals with various indicators before joining in and exiting.