An intelligent trader understands and wanders with the market effortlessly. It doesn't matter what anybody says about stock exchanges & the market; it moves in a particular pattern. Yes! The stock exchange repeats its pattern again and again. There's a complete theory on this by the name "the Elliot wave theory." You can read about it here.
The stock market moves in a repeating cycle. You might have heard that the market crashed. It is one of the four stages we will discuss today. In this write-up, we shall try to learn about the stages or phases of the market cycle and why these phases happen.
Trading Market Cycle: Introduction
Stock prices may seem random, but there are recurring price cycles, which are predominantly driven by the cooperation of big financial institutions. Significant institutional buying plays out in four different phases:
- Rising Stage
- Bullish Stage
- Peak Stage
- Falling Stage
A trader must have a plan to take benefit of price action as it is following. Understanding the four stages of the price will maximize profits because only one of the phases supplies the investor optimum profit moment in the stock market. One will be prepared to profit consistently with less drawdown when one becomes conscious of stock cycles and price phases.
Market Cycle: 4 Major Stages
- The Rising Market It is the foremost stage of a market. When the market is at its dull, deepest down point and shows no signs of recovery, it marks the starting of this stage. All the assets in the market would be falling and undervalued & heavy loss of buyer's confidence is witnessed.
The part of smart traders and financial influencers now play the game and attempt to purchase the undervalued assets as much as possible. Still, there can be several other determinants too for the recovery.
The market gives the sign of recovery in this phase. It is pretty complex to spot this stage as the market is already in distress. An excellent way is to obey the news and events associated with the trading market. Remember, it is not compulsory to purchase at the beginning of this stage. Following the news and ensuring that this stage has begun is the crucial key.
- The Bullish Market After the rising stage started, the market shows no hint of back off. Asset's price gives a bull sign and advances in an uptrend, marking several higher highs and higher lows. The market users get interested and buy more. The big fat investors, which commenced the rising phase, take full benefit here. News, events, and technical tools dispense a positive view of the market and entice more buyers.
It is straightforward to spot this phase as it becomes a hot subject on related events. A trader should seek to enter this market as soon as possible. Looking for buying possibilities using technical tools might catch away the opportunity here.
- The Peak Stage Once the bullish market strikes at its maximum points, this stage arrives into play. Almost all the assets are overvalued now. The purchasing and selling pressure is nearly the same, and therefore, the market gives no further higher highs. It is like the market, after an uptrend, is operating within a price range. Smart investors and influencers realize that the market is at its peak spot and prepare for its next move. What move? Read the next point!
An experienced trader would easily recognize this phase and sells all its holdings. The news, events, and tools dispense mix or neutral signs here, and the noise also deteriorates. New beginner traders should shun purchasing at this phase.
- The Falling Stage It is the end stage of the trading market cycle. After identifying the peak stage, the market influencers understand that their profit is at its peak. Thus, they begin to sell their considerable holdings. As a consequence, the market slowly becomes bearish, and the prices start declining. The market marks various lower lows and lower highs here, and the smart, skilled traders exit the market once they notice it.
But, many traders retain their positions in the market, hoping that the market would jump back again. These are usually the new traders and the ones who purchased assets at the peak stage in the hope of gaining something. Also, it happens when their profits turn into losses, and they expect to get their money back. But, as the prices proceed to fall, they realize to take out their money.
The high selling pressure peaks at this stage and again marks the lowest downtrend. And Yes! You guessed it right, the cycle replicates itself again.
The end of the falling phase marks the beginning of the rising phase again.
So, this was the market round. Every trading market moves through these stages. A good trader recognizes the stages accurately and acts accordingly in his favor. Now, without misusing your time, let's close things off.
Market Cycle: Total Duration
A market cycle can vary anywhere from a few minutes to several years, depending on the market in question, as there are multiple markets to stare at and the time horizon being analyzed. Diverse careers will look at varying aspects of the range. A day trader may view at five-minute bars, whereas a real estate investor will watch at a cycle covering up to 20 years.The Final Say
Nearly all assets follow the journey of the stage, except some. It would be sensible for a trader to enter the stock market during stage one, i.e., the rising stage, and exit at phase three, i.e., the peak stage.
A smart investor holds his emotion aligned with the practical requirements and doesn't let them ride on the subconscious. One great way to recognize the existing market stage is using technical tools. One tool we would recommend is support and resistance level. You can know about them here!
And, last advice from us,
Do not enter unless you are sure of the phase!