Every trading strategy, robot, system or indicator you use was designed to exploit, and by exploit I mean
perform optimally,within some particular market cycle whether you know it not. The market as we know it is divided into four cycles or phases which I mention below;
- Accumulation Market Cycle (The Wait and See Mindset) Transition/Distribution Market Cycle (The Profit Taking Mindset/Re Entry Gear) Mark Up/ Bullish Market Cycle (The Greed Mindset) Mark Down/Bearish Market Cycle (The Fear Mindset)
I use market cycles primarily for gauging external market psychology which is just another fancy way of saying interpreting traders valuation of currency prices as revealed through price action with bulls crowned winners as currency charts trend higher, bears lifting the imaginary trophy on lower trending charts and some slight degree of equilibrium when bulls and bears agree on currency prices, as depicted by a range bound market.
Accumulation Market Cycle (The Wait and See Mindset)
The Accumulation market cycle represents a market condition where theres a kind of balance between buyers and sellers. This is more often the case when traders wait in expectation of the reaction to some major news or political event. This balance resulting from the uncertainty of traders is usually depicted by a sluggish range bound price action on the currency charts.
Savvy traders take advantage of the accumulation market cycle with range bound trading strategies, where they get to establish sort of a price area/zone of support and/or resistance, shorting at resistance levels and buying at support levels inside the range.
I call these price areas/zones clouds because they account for the variance allowing price some leeway which could just be a couple of pips, to move above or below any particular support or resistance level before confirming or disproving the breach of a support/resistance level in which case price just moves right back into its previous trading range.
Say price breaches a major psychological resistance level on the EURUSD chart, the 1.3300 price level only to travel to about 1.3318 before reversing back into the range, an ill advised trader might take the initial 1.3300 resistance breach as a confirmation that price will only continue traveling higher as some forex trading strategy must have instructed him leaving him in the lurk when prices slumps back into the trading range below the 1.3300 resistance price level.
Think of the narrowing price action another characteristic of the accumulation market cycle as you would a spiral spring. What happens when you force the ends of a spiral spring tightly together? It stretches back violently when you release it right? You betcha!
The constricting price action in the accumulation market cycle is usually followed by a surge in volatility after the facts or figures of the news/political becomes common knowledge.
The accumulation market cycle is also very good for Momentum (Momo) Trading opportunities where a trader gets to be on the lookout for breakout trade setups e.g. The straddle trading strategy (i.e. placing buy and sell pending orders just a few pips above or below the support/resistance price levels marking the price range respectively).
Transition/Distribution (The Profit Taking Mindset/Re Entry Gear)
The transition market cycle is one caused by the traders profit taking activity. If you got into a buy trade on the euro at 1.3200 you might want to take some profits off the table at 1.3250 price level or even close the trade completely.
This type of thinking is one that the majority of long traders on the euro like yourself would probably have, since a buy trade was what you had to execute to get into the market in the first place an opposite order which is a sell will be required to close this position with either a profit or loss with respect to the current position of price.
If the traders who opened a long position at the 1.3200 unanimously set their profit targets at the 1.3250 price level, a flood of sell orders will be stacked at 1.3250 since a sell is what is required to close the buy trading position taking their profits off the table.
Theres always has to be two sides before a trade can be successfully matched or executed, for every buy order there has to be a sell. You might have a very good reason to buy or sell a currency but dont forget that the person on the other side of the trade is also in this business to make money, they might probably have a better reason to be at the opposite end of your order, never forget this, because stick to you stops minimizing your risk considerably.
This profit taking causes what we see as retracements or corrections of major price moves on the forex trading chartsCorrections or retracements simply tells us that traders are taking some profits off the table, if this is followed by some continuation chart pattern more traders will see this on the charts and probably follow along with the current established trend buying into the market from the traders who entered the position earlier.
This is the reason behind the 3rd wave in the Elliot wave analysis is usually longer than the 1st and the 5th, let me explain.
The first leg of any move up is subject to partial disregard or unbelief, some traders are likely to see the indications of price reversal but would ignore it when it actually occurs as is always the case with the transition market cycle, some traders will stay on the sidelines waiting to see a very clear confirmation of a reversal before joining in.
Thus, more traders are likely going to see this confirmation before they buy or sell, when theres high demand in the market prices shoot up, the evidence to this can be seen on charts with Elliot waves spotted on them, youll almost always find the height of the 3rd valid Elliot wave to be longer than all the other numbered and lettered Elliot waves.
The chart patterns you must have learnt in your beginner forex trading lessons are gems you can only be thankful for coming across, make sure you dont just dump them for some complicated forex trading system or software thinking theyre just beginner stuff, you have to properly understand the forex trading basics before doing anything else.
The Fibonacci retracement tool helps us when identifying where to jump right into the market and join the continuation or newly reversed trend, the psychology being that sell orders are stacked at some particular levels by traders to take some profits off the table as more and more profit taking happens price fall.
Most inexperienced traders who probably got into the move late end up taking the profit taking orders of the more experienced trader while others simply close the trade because it was in 30 pips profit not so long ago and now its down to -12 pips in losses the moment it goes up to 0 or probably 1 or 2 pips on the positive side again they close the order for fear of losing and not rational or logical analysis.
The Accumulation part refers to the accumulation or stacking of orders resulting from pending orders that make for a successful price correction before the market continues its move up or down.
Mark Up/ Bullish Market Cycle (The Greed Mindset)
The Mark up market cycle refers to that market condition where traders are driven by greed, call it any fancy name like risk appetite, it still doesnt change what it really is, prices move higher as more and more traders buy.
Traders, (and by traders I mean Pro Traders and not canned set up traders), would only buy when they have some solid fundamentals and technical indication supporting their bullish bias, this in turn creates a higher demand for the currency, stock or commodity in question resulting in ever increasing prices.
If the Transition market cycle accounts for price reversal which was successful confirmed by the first leg of extension, the mark up and mark down market cycles sort of nurtures this young price moves to maturity all through infancy.
Ill me much more inclined to take long trades when in a markup cycle simply because more traders know that the market has switched to buy mode and are pretty much following the trend, this causes significant follow through after prices are done correcting and switch back to trend continuation.
Mark Down/Bearish Market Cycle (The Fear Mindset)
The Mark down or Bearish market cycle is one driven by fear. When you touch a hot plate youll probably let it go immediately because it burns, right? Imagine youre in a bullish trade on the euro and just when all seemed to be going well with your trading position in profit an ECB announcement causes traders to think that the Euro isnt strong enough to continue the trek up, this will cause you to close
you buy order banking your profits right? Well thats what most traders will do too and since theres always a bull market in the forex, you could always sell bad news and pocket the difference when prices go lower and the dust settles.
The Bearish Market Cycle provides more wins on short trades, since the announcement thatll probably made price swoon isnt likely going to change any soon, savvy traders switch their bias to shorting the particular currency pair, part of the allure to forex trading is the ability to buy and also short any currency pair giving you the best of both worlds. A major follow through on sell orders is not uncommon, in fact it should be expected and banked upon for the success of our short trading positions in the Mark Down market cycle.
Hope you enjoyed reading this article, dont forget to share it with your friends or colleagues.
Id love to hear your thoughts and comments, if you have any questions dont hesitate to ask them.