What are the Phases of the Market Cycle: Market cycles refer to specific patterns or phases in the market that form with shifts in the market or business environment. Some groups of stocks may outperform others during a market cycle if the cycle improves the stocks’ fundamentals, which is why traders need to identify the current cycle of the market.
The markets are always changing. It moves from a period of a trend to a range, and range to trend.
Four Phases of a Market Cycle:
-Accumulation
-Advancing
-Distribution
-Declining
Accumulation Phase:
Accumulation usually occurs after a fall in prices, and it looks like a consolidation (Range Market) period.
Concept: The start of the accumulation phase comes usually at times when the bearish sentiment is at its peak and traders run to sell their holdings, pushing the prices significantly down. However, value investors and smart money (hedge funds) start to buy those undervalued instruments and the downtrend begins to lose momentum.
Flows are becoming increasingly bullish and prices have difficult times forming fresh lower lows which also offers buying opportunities from a technical standpoint.
It looks something like this on charts:
Advancing Phase:
After the price breaks out of the accumulation phase, it goes into an advancing phase (an uptrend market).
Concept: During the mark-up phase, markets start to consolidate and prices begin to move higher, attracting a large number of buyers who want to join the new uptrend in its early stage. Since prices start to form fresh higher highs and higher lows, technical tools also start to send buying signals and the general market sentiment begins to change.
It looks something like this on charts:
Distribution Phase:
Distribution usually occurs after a rise in prices, and it looks like a consolidation (Again range market) period.
Concept: During the distribution stage, prices are often ranging for a long period of time, as each buying order gets immediately matched with a selling order, i.e. there’s an equal power distribution between buyers and sellers. The bullish market sentiment that pushed prices higher during the mark-up stage starts to vanish and turns neutral.
It looks something like this on charts:
Declining Phase:
After the price breaks down as a result of the distribution phase, it goes into a declining phase (a downtrend market).
This is the stage where traders who do not cut their losses become long-term investors. This is how long-term investors are born.
Concept: Market sentiment becomes increasingly bearish, investors start to sell their holdings and lock profits that increase selling pressure in the market. Other market participants quickly follow, sending prices lower and creating a downtrend in the market.
It looks something like this on charts:
Conclusion:
The markets are always changing. It moves from a period of a trend to a range, and range to trend. That’s why traders need to identify the current cycle of the market. And adapt right strategies on right time which suits on that phase of the market cycle. For example: Trend following strategy will work in trending cycle of the market, it doesn’t like range in the market.
I hope you’ve enjoyed this Information, and give your valuable feedback about the information in the book. Thanks, and I wish you GOOD LUCK AND GOOD TRADING!
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