What are market cycles and how can you use them? for FXOPEN: XBRUSD by FXOpen – TradingView

Market cycles are a cornerstone of financial trading, shaping the opportunities and risks that traders face across various markets. This article delves into the key phases of market cycles, how they manifest in different trading arenas, and how traders can capitalize on these predictable patterns for trading success.

The four phases of market cycles

Market cycles typically consist of four main phases: Accumulation, Markup, Distribution and Markdown. Understanding these phases is integral to traders looking to maximize profits and minimize losses across all types of markets.

Accumulation This is the first phase where savvy investors start buying, often when the market is flat or bearish. Prices are low and there is little interest from the general public. Trading volumes may be lower during this period, making it a favorable time for informed traders to accumulate assets.

Storage After accumulation, prices start to rise. This phase is characterized by growing investor confidence and increased media attention. It is during the build-up phase that the majority of traders enter the market, attracted by signs of a bull market. Technical indicators such as moving averages and RSI often show uptrends. In the market cycle chart above, we can see the crossover between a 21-period and 50-period exponential moving average (EMA) line, indicating bullishness as the build-up begins.

Distribution After the peaks of the noticing phase, we enter distribution. At this stage, those who accumulated assets early begin to sell, taking their profits off the table. This phase often has periods of sideways price movement and can be difficult to distinguish from an ongoing make-up phase. However, trading volumes usually increase as both buying and selling activity increases.

Markdown Finally, there is the markdown phase. At this stage, prices fall, often rapidly. General investors, late to leave, incur losses. This decline continues until assets are considered undervalued, opening the way for another build-up phase.

Market Cycles Across Different Markets Understanding market cycles is not limited to one type of market. Let’s delve into how market cycles manifest in different arenas such as stock, forex, commodity and cryptocurrency* markets.

Stock market cycles

The stock market exhibits perhaps the clearest cycles, mainly because of its long history and extensive data for analysis. Stock market cycles often correlate with economic conditions, and can span months to several years. Accumulation phases often occur during recessions, followed by make-up phases during economic expansion. Expansion and discounting stages can coincide with economic slowdowns or contractions.

Forex market cycles

Currencies trade in pairs in the forex market, which makes their cycles somewhat different. Currency pairs are influenced by global economic indicators and events, from GDP growth to interest rate changes. Cycles here are often shorter, sometimes lasting only a few weeks or months, making rapid strategy adjustments essential.

Commodity cycles

Commodities such as gold, oil and agricultural products have their own cycles, often linked to supply and demand fundamentals. For example, oil prices may rise during geopolitical tensions (markup) and fall when new supply routes open (discount).

Crypto* Market Cycles

The crypto* market is relatively new but has shown distinct cycles, mainly due to its 24/7 trading environment and high volatility. Accumulation often occurs after a significant price drop when the general sentiment is negative. Mark-up phases can be extremely rapid, sometimes lasting only weeks or even days, followed by equally rapid spreading and mark-down phases.

Driving forces behind market cycles Market cycles are influenced by a combination of economic and psychological factors that shape the behavior of traders and investors. Identifying these drivers can provide valuable insights for market participants.

Economic Factors Fundamental economic indicators such as GDP growth, interest rates and inflation often act as catalysts for market cycles. For example, low interest rates can start an accumulation phase, as borrowing costs are low, and investment opportunities look more attractive. Similarly, an increase in interest rates may signal a spread or discounting phase as investors look to exit riskier assets.

Psychological factors Market sentiment plays a decisive role in the cyclical behavior of financial markets. Ideas such as the stock market’s 7-year cycles, although not empirically proven, can influence investor psychology. This concept suggests that financial crises occur roughly every seven years, adding to a sense of impending doom as a cycle reaches this time frame. Such psychological factors can sometimes be self-fulfilling prophecies, leading traders to make decisions based on perception rather than underlying economic conditions.

How Traders Use Market Cycles to Their Advantage Traders use their understanding of market cycles to formulate strategies that capitalize on each phase’s unique characteristics. Here are some ways traders use market cycles to their advantage:

Long Positions in Accumulation Phase During the accumulation phase, informed traders often take long positions and buy undervalued assets in anticipation of a build-up phase. They look for signs of a potential upswing, such as increasing trading volume or bullish divergence in technical indicators such as RSI or MACD. Platforms like FXOpen’s native TickTrader offer such technical tools to recognize and capitalize on market cycles.

Ride the Markup Wave Once in the markup phase, traders can use trend following strategies such as moving average crossovers to seize the momentum.

Short Selling in the Spread Phase Recognizing the onset of the spread phase is key to taking countermeasures. Traders can use short selling to take advantage of falling prices. Technical indicators, such as a moving average transition from bullish to bearish, can act as signals to initiate short positions.

Hedging in Markdown Phase During the markdown phase, traders often consider trend trading strategies and look for effective entry points in downtrends.

The Bottom Line Understanding market cycles is a fundamental skill for traders, providing valuable insights into when to buy or sell various assets. Whether you’re navigating the stock market or trading forex, a well-rounded understanding of these cycles can greatly improve your trading strategy. To put these insights into action, consider opening an FXOpen account to access each of the markets discussed here.

* At FXOpen UK and FXOpen AU, Cryptocurrency CFDs are only available for trading by the clients categorized as professional clients under FCA rules and professional clients under ASIC rules respectively. They are not available for trading by retail customers.

This article represents the opinion of the companies operating under the FXOpen brand only. It should not be considered an offer, solicitation or recommendation regarding products and services provided by the Companies operating under the FXOpen brand, nor should it be considered financial advice.