How do you trade market cycles?

1 Identify the phases

The first step to trade market cycles is to identify the different phases that make up a cycle. Typically, a market cycle consists of four phases: accumulation, markup, distribution, and markdown. Accumulation is when prices are low and smart money starts to buy. Markup is when prices rise and the trend becomes established. Distribution is when prices are high and smart money starts to sell. Markdown is when prices fall and the trend reverses. Each phase has its own characteristics, such as volume, volatility, and indicators, that can help you recognize it.

2 Align with the trend

The second step to trade market cycles is to align your trades with the dominant trend of the current phase. This means that you should buy in accumulation and markup phases, and sell or short in distribution and markdown phases. You should also adjust your time frame, position size, and stop loss according to the length and strength of the trend. For example, you can use longer time frames, larger positions, and wider stops in strong and sustained trends, and vice versa in weak and choppy trends.

3 Anticipate the transitions

The third step to trade market cycles is to anticipate the transitions between phases and prepare for them. Transitions are the turning points where the market sentiment shifts and the price direction changes. They can be triggered by catalysts, such as earnings reports, news events, or technical breakouts or breakdowns. You can use various tools, such as trend lines, support and resistance levels, chart patterns, and oscillators, to identify potential transitions and confirm them.

4 Adapt to the conditions

The fourth step to trade market cycles is to adapt your trading style and strategy to the changing market conditions. Different phases of a market cycle may require different approaches, such as trend following, swing trading, or scalping. You should also be aware of the risks and opportunities that each phase offers, and adjust your risk-reward ratio, entry and exit signals, and trading frequency accordingly. For example, you can aim for higher rewards and use more aggressive signals in markup and markdown phases, and lower rewards and use more conservative signals in accumulation and distribution phases.

5 Learn from the feedback

The fifth step to trade market cycles is to learn from the feedback that the market gives you and improve your trading performance. You should keep a trading journal and record your trades, including the reasons, results, and emotions behind them. You should also review your trades regularly and analyze your strengths and weaknesses, as well as the patterns and mistakes that you make. You should use the feedback to refine your market cycle analysis and trading strategy, and to develop your trading skills and discipline.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?