Market Price Cycle
Market price cycle is one of the foundation to successful trading career. Traders, especially Newbies fail to recognize that market price moves in a cycle.
Sometimes, they forget to expect the the end of the current market phase. However, cycles exist in all markets and they are repetitive in nature.
Market cycles are driven by large institutions or corporations.
Market moves in four cycles or phases namely;
- Accumulation phase
- Mark-up phase
- Distribution phase and,
- Mark down phase.
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Accumulation (Expansion) Phase: At the phase, there is economic growth and this lead to a Bull market.
Buyers begin to buy, while general market sentiment is still Bearish.
Double bottom and inverted Head and Shoulder is more visible at this stage.
Mark-up Phase: At this phase, buying momentum has increased. It reaches the peak and transition to a consolidation stage. Higher Lows and Higher Highs price swings are more visible at this stage.
The cycle is nearing the top at this phase and experienced traders begin to pull out. While the amateur traders start to see a clear Buy opportunity and start to jump in.
Distribution (Contraction) Phase: Here Seller dominance comes in. Market recession time has come and the market becomes weak.
Double top and Head and Shoulder patterns are more visible at this stage.
Mark-down Phase: At this stage, market price starts to fall and selling momentum increases. Lower Lows and Lower Highs price swings are more visible at this stage.
Market cycle varies from time frame to time frame. The market phase on 1 minute time frame will definitely be different from that of the 4 hour time frame.
Profitable trades are made mostly when the phase on a higher time frame aligns with the phase on the lower time frame.
Key Drivers of the market cycles are;
- Interest rates
- Economic growth rate
- Unemployment levels
A fall in interest rate will lead to economic growth and this will send market price high.
On the other hand, a hike in interest rate will slow down of economic growth which will lead to fall in market price.
A rise in inflation will cause interest rate to go up will will make market price to fall.
On the other hand, reduced inflation will lead to falling interest rate will will make market price go high.
Falling unemployment rate will lead to economic growth which will send market price high.
On the other hand, a rise in unemployment rate will lead to slow down of economic growth which will lead to a fall in market price.
Professional traders or Elliott wave traders see price cycle like the way we see ocean waves. The most visible part of ocean wave is when it breaks at shore.
However, the wave must have been created by some form of wind energy which transmits to circular motion that moves towards the ocean shore.
At times, they range in size from small ripples to huge tsunamis.
However, the same ocean wave progression is similar to market price movement.
In an uptrend, price forms higher highs, and high lows for a period of time before it starts to consolidate.
On the other hand, in a downtrend, price forms lower lows and lower highs before it starts to range at some point.
Bullish Price Cycle;
In a Bullish cycle, price prints a high that breaks the previous high. A minimum of two closes above the highs is good for bullish circle confirmation.
The image below shows a three-cycle-bullish-price-movement.
At least two Higher Highs are required, as anything short of this will be termed as a fake-out.
Bearish Price Cycle;
In a Bearish cycle, price prints a low that breaks the previous low. A minimum of two closes below the lows is good for bearish circle confirmation.
The image below shows a three-cycle-bearish-price-movement.
At least two Lower Lows are required, as anything short of this will be termed as a fake-out.
The magnitude of the price cycle is important. Are the new legs in the cycle increasing or decreasing in magnitude? One should ask this question.
Cycle magnitude may be measure in pips. Measure the amount of pips from swing low to swing high, from one cycle to another can also be of help.
A look at the above image shows the first leg move down from the swing high at point A covered a total of 105 pips.
While the second cycle low move covered a total of 140 pips from point C.
This shows more commitment on the sellers side, more sellers are coming in as shown in the new cycle low.
The implication is, the Bears are in full control, and there is a greater chance that downtrend will likely continue.
The Velocity of price move also plays a major role.
In the image above, you will see how it took seven 4 hourly bars to cover 85 pips, as against how it took five 4 hourly bars to cover 110 pips.
This shows the upper cycle has more velocity, and the cycle is stronger and continues to proper in a healthy manner.
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