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 or investing, the market can only move in one of these three cycles.
The Three Market Cycles Are:
The consolidation cycle has several looks with a parallel line of bars on a chart staying within support and resistance being the most common one. A "flag" is also another for short-term consolidation. Moving rates 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. you can trade the support and resistance line to make profits in a consolidating market.
A breakout of the consolidation happens when you have a few bars either at support or resistance of the price and then the price sharply breaks out to make a new high or low.
After a breakout, usually a trend develops with the market moving in the direction of the breakout, whether it's up or down.
Although most traders like to trade trends, the bad news is that currency prices do not move in one direction consistently making identifying up or down trends a form of an art.
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.
On average the Forex market trends about 30% of the time, breaks about 10% of the time and consolidates for the remaining 60% of the time.
Ironically, the two most used strategies are for trending and breaks of the consolidation cycle. That approach accounts for only 40% of potential trades and 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.
Not one strategy will cover and be effective in all of these 3 cycles. You should have a tested strategy in your toolbox to cover each of these 3 cycles to become a successful trader. Once you identify what cycle the current market is in, just pull out the right strategy from your toolbox and drive it to profits.