Understanding the market cycles and how to trade them is critical to succeed as a trader.
What are market cycles?
The market is made up of three major market cycles and your ability to recognize and adapt to the current cycle will significantly increase your probability for profits. Regardless of what market you are trading, the market can only move in one of these three cycles.
The Three Market Cycles Are:
1. Trending Cycle
A trend occurs when the market moves in one direction whether is up or down.
Higher lows combined with higher highs makeup and uptrend. Conversely, lower highs combined with lower lows would make a downtrend.
The bad news is that currency prices move do not move in one direction consistently making identifying up or down trends a form of an art.
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2. Consolidation Cycle
This cycle is also known as a Non-Trending or a Ranging market. The consolidation cycle has several looks with a sideways / horizontal line of bars on a chart being the most common one. A “flag” is also another for of short-term consolidation. Moving averages or other indicators will help you determine whether the market is consolidating or trending.
Tip: If you are using a moving average as your indicator, the line will almost be horizontal when the market is consolidating.
3. Breakout Cycle
A breakout of the consolidation happens when you have at least 7 bars either “supporting” or “resisting” a price and then the price sharply breaks out to make a new high or low.
How to apply the 3 cycles to your forex strategies…?
For starters, many forex traders implement a strategy for one and maybe two of these cycles.
Recent studies show that on average the forex market trends about 30% of the time, breaks about 10% of the time and consolidates for 60% of the time.
Ironically, the two most used strategies are for trending and breaks of the consolidation cycle. That approach potentially leaves you out of a trade about 60% of the time. Every trader should have a proven strategy for the consolidation cycle to take advantage of this cycle.
You should have a strategy to cover each of these 3 cycles to become a successful trader.
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