The Life Cycle of Markets.
Price action and Macro.
The future is unpredictable, but analysis can help traders get probabilities in their favor. Matching the appropriate strategy with the correct market condition can assist in this analysis. Below, we explain the three primary conditions and how traders can approach each.
As a large portion of the United States gets pummeled with record-breaking onslaughts of snow, it’s hard to remember that spring is right around-the-corner. Blankets of snow and sheets of ice get replaced by green shoots of grass and singing birds; welcoming a new and better time.
To those of you living in a comfortable year-round climate, wondering why someone might want to put up with such misery; well it’s because the cold of winter only makes the warmth of spring and summer that much better. ‘It’s just the seasons,’ as they say. It’s just a cycle; a pattern that nature has been working on for as long as people have roamed this earth.
Most living things have cycles. Markets have cycles too. And to the trader looking to make money in markets, the identification of such cycles is of the upmost importance.
Because if we wear our winter jackets, and gloves, and scarves in the middle of summer – well, we’re probably in for a pretty uncomfortable time.
And the same thing goes for right now: If I were to walk outside in a sleeveless t-shirt, shorts, and flip flops I’d likely catch hypothermia and be in for a very bad time, to say the least.
It’s the identification of these cycles and patterns that allow us to work with them. It’s just as Charles Darwin said: “It’s not the strongest, or the smartest of a species to survive. It’s those that are most wiling to adapt.”
If you want to survive as a trader, you have to learn how to adapt. In this article, we’re going to show you how to do that.
The Cycles of a Market.
Most markets will exhibit one of three predominant market conditions. It doesn’t matter if you analyze a market fundamentally, or technically, or spiritually, or by consulting with the stars: Prices move in different types of patterns.
But traders don’t just want to identify these patterns; they want to use them. By identifying these patterns, or ‘states’ of a market; the trader can more eloquently decide how to trade in that particular environment.
The three major market conditions are trends, ranges, and breakouts; as shown below.
The Life Cycle of a Market.
Created with Marketscope/Trading Station II; prepared by James Stanley.
Once again, these conditions or states are often driven by fundamentals or news (or in the case of some ranges, a lack thereof). And once a trader identifies these conditions, they can employ the proper strategy to trade in that market.
The Trend is Y our Friend.
We talk about trends and trend-trading a lot at DailyFX. And there is a reason for it: The future is uncertain, and while identifying a market condition is of great help, it’s never going to work 100% of the time because things in the future change.
By identifying a trend, and noticing a bias that has existed in the market recently, we may be able to jump on that theme so that if it continues we might be able to see some profitable trades.
But trading a trend is a bit of a conundrum. See, it’s not enough to simply say ‘the trend is up so I’m just going to buy it.’ No, we want to enter in trends more efficiently than that. So, if I want to buy an up-trend, I really want to do so as cheaply as possible, which is he conundrum. I want to buy after price has come down.
When traders are speculating in a trend, they want to look to employ that age-old logic that we’ve been taught since we were all toddlers: Buy low, and sell high.
But what is ‘low’ and what is ‘high.’ These are relative terms that are worthless to the trader that doesn’t know how they want to define their entries.
We tackled this topic in-depth in the article How to Build and Trade a Trend-Following Strategy . In the picture below, taken from the article, we show you how traders can look to approach a trend-trading strategy using price action :
Trend Traders Want to Buy Low, and Sell High.
Price action can be hugely beneficial when trading in trends, but many newer traders may have difficulty grasping the best way to employ this type of analysis into their trend trading approaches.
Another alternative is for traders to use simple indicators to define the trend and enter in the direction of that trend. This can even be taken a step further using Multiple Time Frame Analysis.
So, for example: A trader can use the 200 period moving average on the daily chart , and if price is above the moving average they are looking to buy while if price is below they are looking to sell.
They can then go down to the 4-hour chart to look for MACD signals in the direction of that trend. So if the trend was up on the daily chart, the trader wants to see MACD crossing up and over the signal line for a trigger into a long position.
When MACD crosses down and under the signal line, the trader can look to exit the position; and can look to re-enter on another bullish MACD crossover provided that the trend is still ‘up’ per the daily chart.
Unfortunately, trends don’t last forever. Eventually prices get so high, or so low that new buyers or sellers are hesitant to enter the market. This can create congested or ‘back-and-forth’ types of markets that can be daunting to speculate in.
But there are two ways to approach such situations… in the first, the trader can look for this ‘ranginess’ to continue; looking to sell resistance, or to buy support with the expectation that prices will move to the other side of the range.
We looked at various ways to do this in the article, How to Trade Ranges .
Once again, price action can be of huge assistance; as noticing that prices have been range-bound is a necessity for being able to speculate in this type of condition in the first place. Below, we show a picture from the article How to Analyze and Trade Ranges with Price Action that illustrates how exactly a trader can look to do this using price, and price alone.
Price Action Helps Traders See Price Levels that Have Been Important.
But ranges, like trends, don’t last forever. When a range is violated, a new market condition comes about…
Breakouts are one of the more difficult market conditions to master, as the accompanying price movements can be volatile, violent, and extremely costly if we find ourselves on the wrong side of the move. We covered how traders can approach this condition in-depth in the article, Trading t he Break .
But breakouts emanate from ranges. In many cases, a piece of news or some type of fundamental driver will create enough supply or demand in a market so that the previously established range breaks; and when that happens the move can be massive.
Breakouts Come From Ranges, and Lead to New Trends.
The problem with breakouts is that it might take three or four breaks of resistance to actually catch the move. So traders are usually best advised to be even more aggressive in their risk management of such strategies; looking for three or four times the initial risk amount when the breakout succeeds.
A Final Note on Life Cycles.
Markets are unpredictable, as are the various life cycles that they may exhibit. Analysis is simply a way to try to get probabilities on our side, if even just a little bit. Noticing the market condition and employing the appropriate strategy is a key variable to increasing the effectiveness of that analysis, but risk management is the tying bind that makes long-term profitable trading possible.
Mr. Jeremy Wagner covers this topic in-depth in the article, Risk versus Reward ; and if you want to get more comfortable with that topic, I highly recommend clicking on THIS LINK .
-- Written by James Stanley.
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Understanding the Trading Cycles in Forex Market.
Trend Is Your Friend.
Forex trading systems are what we often call “ reactive systems ”. There are many factors at work, and they cannot be quantified and measured to enable decision making. Forex traders, therefore, trade the trend. In other words, they try to time the market.
Most successful Forex traders believe that the markets have a cycle . This cycle is the result of human behavior in the markets. As a result of this innate human behavior, trends seem to repeat in the market. If a trader can chart these trends and predict future movements, a fortune can be made! The critical part here is recognizing the different stages in the market and which stage you currently lie in.
In this article, we will understand how a trader can recognize the four different stages in the trading cycle. We will also have a look at how a trader can then use this information to make profitable trades.
Equilibrium: Moving Average.
Trading is all about understanding what equilibrium is. Equilibrium is the correct market price at which the stock should ideally sell. If the market price is below equilibrium, then the trader should go long. If the market price is above the equilibrium, then the trader must consider the currency pair to be overpriced. Forex market traders define equilibrium as the moving average of the past prices. Moving averages are calculated for different durations. They could be calculated for 50 days or 200 days or so on. Depending upon how long term or short term a trader wants to trade, he/she can use the moving average to figure out the equilibrium price.
Stage 1: Range Bound.
In the absence of any trend in the market, currency pairs tend to be range bound. They fluctuate between predictable daily highs and lows. The Bulls try to raise the price, but they immediately meet with resistance from the bears. If the price moves downwards beyond a given range, once again the forces of equilibrium raise the prices back to the equilibrium. In such scenarios, traders should make multiple short term trades. They should sell after the movement of just a few pips because in case they do not, the prices will fall back.
Range bound movements typically end in a breakout which is the second stage of this cycle. The longer time the range bound movements persist, the bigger is the breakout. Also, some market participants may try to create a fake appearance of a breakout. Forex traders can avoid being duped by these market manipulators by checking the volume of trading that is happening to ascertain if the price discovery process is functioning as intended.
Stage 2: Breakout.
Stage two is the breakout stage. This is the stage where the market breaks its inertia meaning that range bound movements are converted into clear upward or downward trends at this stage. The breakout stage can take a couple of forms depending upon the velocity of the underlying currency pair.
Straight Up: The movement could lead straight up in case there has been some drastic change in the underlying currency. This happens rather quickly and then the price plateaus. Traders should either jump into the trade early or they should not jump into it at all. Entering this trade later could mean facing a flat price or a downside.
Higher Peaks and Valleys: The movement may not be so one-sided if the breakout is not caused by a clearly identifiable change in fundamentals. In this case, the market will face resistance as it moves up. At each point, it will reach a higher price. Also, each trough will also be higher than the previous one. Hence, the price may fall in relation to intermediate points but will only rise as compared to the original price.
It is important to note that during this stage, the moving average price rises. Hence, the trend analysis within itself carries the seeds of a return to equilibrium.
Stage 3: Decline.
As the name suggests, stage 3 is when the prices peak out and start returning to earlier levels. This stage can also have different scenarios based on the momentum of the markets.
Nosedive: Once again if the fundamentals of the currency pair have changed, the market will react very quickly. The prices will be down by several percentage points in an instant. Short positions should either be taken very quickly or not taken at all.
Falling Peaks and Troughs: Price could fall in a series of peak-trough movements. This means that the price will not fall in a straight line but will face resistance at each level.
In this stage, the moving average falls and hence this stage carries in itself the possibility of a rebound.
Stage 4: Uncertainty.
After a bull and bear run has been completed, the market faces uncertainty. The cycle has to start all over again. However, few people are able to guess the future course of action correctly. This stage is characterized by marked volatility. Since any kind of prediction is so difficult even with the help of technical indicators, investors are generally advised to stay away from the market during this stage.
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Forex Time Cycle Monitor Explained.
Forex Time Cycle is one of many unique tools we have created for use with forex trading.
First, take a look at an example of the time cycle table.
Each cell provides you with 2 turning points based on the hourly chart of the pair labelled at the top of the cell. The turning points are reported in GMT.
For example, a bottom projected at 10/11 10P (as taken from the EUR/USD pair) means that short term cyclical behaviour in EUR/USD is likely to strengthen up on Oct 11 10 pm GMT. In Eastern Time, that is Oct 11 5 pm.
By looking into all possible combinations of time cycles in the near term, the strongest cycle can be identified that, should one choose to blindly follow the turns of the particular cycle, one can outperform all other purely time based cycles.
Such method works alright for a single pair given proper money management is applied.
When the concept is applied across many pairs, however, something much more useful is discovered.
When a particular currency is found to turn stronger (or weaker) against multiple currencies within a short time window, the probability of a strong directional move increase significantly. This makes the Forex Time Cycle a great complimentary tool for any primary trading signals one employed.
If you are interested in more powerful cycle analysis, our proprietary Intraday Cycle Projection and Weekly Cycle Projection will be of interest to you. They are provided as part of our premium membership and you can access the projections easily by clicking one of the supported forex pairs on the left-hand side of this page.
Check out the previous projections yourself. You may find the best trading tools you have been looking for all along.
Your information will not be shared with anyone.
But what is, or where is, thisTime Cycle Monitor tool? The example refers to price action some weeks ago. How can it be used for current price action? Is it intended to be updated daily like the Cheatsheets or will the tool itself be made available to NT users?
The Time Cycle Monitor is updated daily, showing on the first page of this site. You do not notice that?
Thanks – I probably did notice it when I first looked last week but today I was just looking at article itself and beamed off the too hastily.
Which currency is more accurate in cycling behaviour?
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