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Market Cycle and Its Importance in Forex Trading Explained

In Forex trading, the price can move up or down randomly. The same applies to other instruments and assets. Traders involved in technical analysis know that there are some distinct repetitive phases also known as a market cycle. It depicts predominant market moves that influence the way large institutional investors act to ensure successful trading.

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A market life cycle is the one to be watched by individual investors, as it will let them predict the next moves. In this article, we will describe all phases of the market movement and why they are important to watch closely.

4 Major Market Cycle Phases

A market life cycle has 4 major phases. They include:

  1. Accumulation or expansion.
  2. Markup or peak.
  3. Distribution or contraction.
  4. Markdown or trough.

The situation is very similar to business cycles though with some specific differences and factors to take into account. Let’s have a closer look at each phase of the market cycle.

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Accumulation

While the economy grows, the market is witnessing expansion. As a result, we can observe a bullish situation with the majority of investors seeking to purchase an underlying asset. The phase may last for several years when proper economic steps and measures are taken.

Markup

When the buying pressure reaches its peak, we can observe the next stage also known as markup. It is associated with investors who are no longer interested in purchasing assets that reach the highest value. At this phase, we are witnessing the transition to the contraction (distribution) stage.

Distribution

The next stage is associated with market weakening. Experts also call this particular cycle a recession. It eventually leads to the last stage of the market life cycle.

Markdown

During the rough stage, the market reaches the lowest possible point. At this phase, it starts a new cycle and eventually continues the transition to the expansion stage.

Major Market Cycle Drivers

The market life cycle is driven by several natural factors. It is mainly influenced by a set of macroeconomic factors that include:

  • Inflation rate.
  • Economic growth.
  • Interest rates.
  • Unemployment level.

If the interest rate drops, we can see the market moving higher to reach another level of economic growth. At the same time, a growth of inflation is a sign of the rising interest rate, which means the economic growth is slowing down and we are about to see a recession.

Additionally, investors can use market sentiments to determine a particular phase of the market cycle. It is very important in case you want to identify a period with investors scrambling to purchase a specific asset or a stage when panic takes over the market making investors go short on their instruments in larger quantities.

The Influence of Market Cycles on Asset Value

To become a successful investor, you need to have forex strategies that work well under various market conditions. What’s more, you need to have an approach that lets you benefit from the current price action. Some experts follow the Elliot wave theory. Others apply specific MT4 tools to make market forecasts and identify the price highs and lows.

The main idea is to follow the concept that says “every action leads to the opposite or equal reaction”. In other words, if an asset value drops or raises, the movement will continue with a contrary action.

The End of the Market Cycle

The length of each market cycle is very close though not necessarily the same. Even if one phase is as much as 1/6 of the median stage, it can still be associated with a separate cycle. A cycle ends at the dawn of the new stage. So, if you are able to define the transition stage from one to another cycle, you will have a chance to foresee the potential direction of the trend.

The Length of the Market Cycle

As stated earlier, some cycles can last for years, when all necessary steps and measures are taken to support the economy. In reality, some phases may last for several weeks while others can continue for years. The total length depends on a set of fundamental economic factors and specific parameters of the underlying market.

Additionally, your Forex trading style can also define the length of a market cycle. When following a forex day trading concept, you can witness several cycles in less than a week, for example, when using a 15-minute chart pattern. Oppositely, swing traders can never see the full cycle completed in the next few weeks. If you invest in the real estate market, you may not see the next phase up to decades or even longer.

Market Cycle Indicators

Technical analysis delivers instruments to predict almost any situation on the market. Investors can use them when locating specific market cycles as well. CCI, DPO, and other tools can be very effective whenever you want to explore the cyclical nature of the market in question.

CCI works great if you trade commodities. At the same time, it will come in handy for those involved in stock and Forex trading. The DPO indicator is an instrument to identify oversold and overbought market conditions. Moreover, it is a great tool to see when a specific market cycle ends and transitions to the next one.

The Bottom Line

The ability to understand and locate market cycles is very important for any investor. It will let you gain maximum returns when trading currencies, commodities, crypto, and other markets. The concept is very important for those who also trade CFDs and derivatives. As a result, we have an approach with different market phases letting one define when it is the best time to go long or short depending on the strategy.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.