What are market cycles and how to take advantage of them

Market cycles in financial markets are trends or patterns in price action that tend to repeat over time.

Let’s examine the four (4) phases of market cycles and how this knowledge can benefit your forex trading activity:

1. Accumulation

This is the first phase of the market cycle. It occurs after a downturn (after the market has bottomed in the previous cycle). It marks the end of a bearish season/consolidation period.

Here, selling pressure reduces, we see demand grow, and no new lows are formed (in most cases). The downtrend starts losing its momentum and an uptrend begins to emerge.

This stage absorbs sell orders to push prices higher.

If you want to trade this level, look for reversal signals like bullish divergence, double bottoms or oversold conditions.

Entering early can result in good profit when the market moves into an uptrend.

2. Markup/Uptrend

Often regarded as the longest phase of the trend, the markup phase is the period when momentum builds from the initial interest in the accumulation phase.

We see prices begin to rise to new highs. Investor sentiment is bullish, and there is a strong demand for the asset. More traders try to take advantage of the uptrend.

The market begins to witness a large number of buyers who want to join.

Late in this phase, FOMO and greed begins to kick in – overbought condition. The trend starts to exhaust.

To trade successfully, use trend-following strategies (such as moving averages or trendlines).

It may be effective to buy pullbacks to support levels.

3. Distribution

At this phase, the bullish sentiment at the markup stage begins to fade as the market approaches the peak of the cycle.

We can notice a mixed sentiment from traders. One group is optimistic, the other is cautious.

Consequently, prices often move sideways in a trading range reflecting a balance between buyers and sellers — Consolidation.

New highs are typically not achieved. Attempts to rally may fail, implying a weakening demand.

Selling volume often increases as smart money (institutional investors) offloads their positions to less experienced retail traders entering due to FOMO.

Distribution phase can be an emotional period for many speculators.

So it would be wise to avoid long positions unless you’re scalping short-term opportunities within the range.

Also find bearish indicators or reversal patterns and prepare for potential opportunities as the phase moves into markdown.

4. Markdown phase

The last phase of the cycle. Here, market sentiment turns pessimistic and there is a selling spree. Prices decline very fast.

Soon, the accumulation stage begins again, and the preceding phases follow.

It is important you focus on short selling opportunities.

FAQs

How long is the market cycle?

There is no fixed duration. It all depends on the financial market and (or the timeframe) analysed.

In stocks or commodities, it can last from a month to years. While in forex, it can be a matter of one hour, a day, days, weeks, etc.

What is a cycle in the forex market?

A cycle in the forex market is a price pattern that has repeated over a timeframe.

How to know when the market is down?

The market is said to be “down” when prices of an asset fall.

What does short selling mean?

Short selling is a method where a market participant sells an asset at the current price with the belief that the price will go down so he can buy for profit.