Market bubbles are well-known, and most of us understand someone that has been trapped in one. Despite the fact that there are several things to learn from previous bubbles, market players are nonetheless lured in whenever a new one emerges. A bubble is merely one of numerous market phases, and it is critical to understand these phases in order to avoid being arrested off guard.
What exactly are market cycles?
Market cycles are market patterns that emerge as a result of changes in the market or institutional contexts. Some classes of companies may exceed others throughout a market cycle if the cycle strengthens the foundations of the stocks, which is why traders must recognize the present market cycle.
It is difficult to ascertain the timing of a market cycle that is still in progress. A market cycle may last barely 10 minutes for certain traders, such as scalpers, while a whole cycle may span a year for position traders. A Kondratiev wave or an Elliott wave supercycle, on the other hand, would last up to 60 years.
A new market cycle is frequently formed as a result of changes in the regulatory environment, technology, or the introduction of new products. Earnings of afflicted enterprises frequently rise and decrease over these times, with a similar growth trajectory.
While pinpointing the start or finish of a market cycle is difficult, they always went through similar stages and are volatile. All cycles begin with a rise, peak at the top, then decline and bottom out at the end. The end of one phase marks the beginning of the new cycle.
Knowing how each step of the market cycle works may have a significant impact on your bottom line. As stated, a market bubble is nothing but a market cycle, and recognizing the basic features of phases can assist you in avoiding being caught unawares.
The 4 Phases of a Market Cycle
Market cycles are divided into four stages: accumulation, mark-up, distribution, and downtrend.
#1 Accumulation
Every market cycle begins with the accumulation stage. It begins at the conclusion of the preceding cycle, when the market has bottomed out and stock values are low. This is an excellent opportunity to purchase in the market since prices are cheap and a trend reversal is just around the horizon.
After the market has bottomed, innovators, business insiders and a few value investors, and trendsetters, clever money managers and experienced traders, begin to purchase, believing the worst is past. At this level, values are highly appealing, yet market sentiment is still adverse.
However, because markets are still in a decline, detecting the start of the accumulation period is difficult. Following market news or having a trading coach with you might help you obtain a sense of the present phase of the market cycle.
The accumulation phase often begins when adverse sentiment is at its greatest and traders rush to sell their holdings, driving prices sharply lower. However, value investors and clever money (hedge funds) begin to purchase those undervalued products, and the downturn begins to wane.
Flows are growing increasingly optimistic, and prices are finding it tough to create new lower lows, which provides technical buying possibilities. Look for common reversal patterns, such as inverse head and shoulders patterns and double and triple bottoms, or take help of a trading coach.
#2 Mark-up
At this phase, the market has remained stable for some time and is starting to rise. The early majority has jumped on board. This group comprises technicians who identify that market direction and sentiment have shifted when the market makes higher lows and higher highs.
Finding the mark-up phase is a little easier than finding the accumulation phase. News stories grow increasingly upbeat, and purchasing pressure continues to drive up prices.
Buyers are waiting for any hint of a price correction near the conclusion of the mark-up period in order to enter the market at more favorable rates. The late majority of buyers are getting in, pushing prices to all-time highs and giving the market one more boost.
Traders can benefit from the mark-up stage by riding the uptrend for as long as it lasts. Technical traders can utilize trend-following tactics to purchase at each higher low during an uptrend, whereas fundamental traders can buy when market news improves and business earnings rise. Taking trading classes would also be advantageous.
#3 Distribution
Sellers begin to dominate the market in the third stage of the market cycle. This phase of the cycle is distinguished by a period during which the preceding phase’s bullish attitude transforms into a mixed sentiment. Prices are frequently trapped in a trading range that might linger for several weeks or even months.
The emergence of traditional reversal patterns, including head and shoulders patterns, double tops, and triple tops, can help technical traders detect a distribution phase. This is an excellent opportunity to sell in the market, since prices have attained new highs and values have reached their apex. Others enroll in a trading class in order to enrich themselves.
Traders often remain on the sidelines and avoid adding to their long positions, waiting for economic fundamentals to deteriorate before taking gains and selling their assets. At the conclusion of the distribution stage, economic data begins to come in below expectations, and market sentiment begins to deteriorate.
#4 Mark-down
The decline or mark-down stage that follows the distribution stage is the final stage of a market cycle. As market sentiment gets more pessimistic, investors begin to liquidate their positions and lock in profits, boosting market selling pressure. Other market players quickly follow, bringing prices down and causing a market decline.
While prices begin to form new lower lows and lower highs, some market players who purchased at the apex of the mark-up or distribution stage continue to retain their positions in the hope that prices will climb further.
Regrettably, prices continue to decrease as a result of poor economic fundamentals and intense selling pressure, lowering stock valuations and creating a buying opportunity for traders who have identified the conclusion of the downturn. The accumulation stage begins to occur at this moment, and a new market cycle will begin. For profitable stock trading, you may benefit from One-on-One Trading Coaching.
Conclusion
Traders who understand the various stages of market cycles have a significant edge over other traders. Smart investors who understand the various stages of a market cycle are better prepared to profit from them. They are also less likely to be duped into making a purchase at the worst possible time. Use this article as a guidance and get in touch with us right away if you need further assistance.