3 Trading Cycles every trader should know

The market is moved by a countless number of trading cycles but, there are 3 cycles which influence all the others:

  • The economic cycle.
  • The emotional cycle.
  • The Accumulation/Distribution cycle.

Let’s analyse them one by one.

ECONOMIC CYCLE

economic

Expansion: Growing confidence, economic growth, low inflation

Boom: Boom mentality, growing inflation, restrictive policy.
Recession: Slowing GDP, inflation continues to rise.
Depression: Negative GDP, inflation peaks, weak confidence.

The standard duration of the economic cycle is 4 years.

How does the market move with the economic cycle?

The stock market, since it’s based on expectations, will move before the economy.

immagine

The evidence of the economic cycle in the forex market

Cycle indicator set on the 200 weeks ( 4 years )

eurusdweekly

CYCLE OF INVESTOR EMOTION

The markets do not exclusively depend on company or industry specific data and earnings, this is because investors and trader are emotional and the emotions move the price far from the its true fair value.

emotional-trading-cycle

Emotions do not only influence the market but your equity as well.

  • When you have a lot profitable operations, greed or euphoria will make you increase the %risk for operation. Your drawdown risk exponentially increases and with only a few operations you burn all the previous profits.
  • When you are on a losing streak, the panic will make you overtrade, increase the size (Martingale) or change your trading system just before the recovery.

A profitable trader behaves the same way with both losses with gains. Keep an eye on your emotions.

ACCUMULATION-DISTRIBUTION CYCLE

This cycle is characterised by 4 phases:aaa

  1. AccumulationThe main emotion in the market is Pessimism.
    The Smart Money start to buy at the market. In order to move the price up the purchases are made gradually. This forms a series of sideways movements.
  2. Mark-Up: Once the accumulation is finished, the prices start to rise and optimism spread between the market participants.
  3. DistributionRetail Traders join the market Euphoria and start to buy.
    The Smart Money start to sell their shares to the public, the result is another sideways market.
  4. Mark Down: Without the demand of the Smart Money the market starts to drop deeper and deeper.

Example:

trading cycles

And NOW? In which phase are the markets?

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