An important part of any traders’ forex strategies is understanding the market cycles.
So what are market cycles?
Not knowing what market cycle you are in will affect your forex trading. Knowing the correct major market cycles is important for you and which forex trading system you should be using. As each cycle requires a different approach from your forex trading system.
There are three major market cycles and the ability to adapt to each cycles is an important part of your forex strategy and will improve your profitability.
So you need to understand how to determine the market cycles if you want to become a successful trader.
The three major cycles are:
The Three Market Cycles
It does not matter what financial market you are trading, the market can only move in these three cycles.
A common saying amongst forex trade is “The Trend is your friend.”
Trending is when the market price moves in the same direction consistently in one direction either up or down.
How a forex market trend is inherently defined? A trend can be defined as progressively higher lows and higher highs.
Of course if the price movement consisted of a straight line either up or down, then identifying a trend would obviously be very easy.
In real life, currency prices move do not move in one direction consistently, so denying forex traders and easy trend read.
A Consolidation cycle also known as Non Trending or Ranging market, which looks like a sideways / horizontal line of bars on a chart. Consolidating is when the market is struck between two horizontal support and resistance levels and cannot break these support / resistance levels for at least seven bars.
You can use moving averages or other technical indicators to determine whether the market is consolidation or trending. In case of a consolidating market, the moving average line will almost be horizontal.
Now what is breaking out of a Consolidation? After the market has been consolidation for at least 7 bars and then the price sharply breaks out of this ranging market sharply to make a new high or low.
That is basically it for the cycles
How does this affect your forex strategies…?
The majority of forex traders only have a forex strategy for one or two market states. The most popular forex strategies being Trends and Breakouts.
But recent research has shown that on average the forex market is in a trending cycle about 30% of the time, breakout cycle about 10% of the time and Consolidation for 60% of the time.
So if your only forex strategy is for a trending cycle then you will only be trading for 30% of the time and if you are one of the few that have more than one forex strategy with the most common being the trending and breakout strategies, then you will still be trading only 40% of the time.
This means that you will be sitting on the sidelines for about 60% of the time. Whilst it is always important to have the patience to wait and pick high probability trades, waiting for the market to change cycles because you do not have a forex strategy for this cycle does not make sense.
Some forex traders will then get sucked into making trades with the wrong strategy into market cycles that the strategy just will not work in.
This year in the July and August the market spent the majority of its time in consolidation and breakouts with very few trends happening. A lot of traders I know only did not have a strategy for this type of cycle so they either lost money over these months or stopped trading altogether until the marker started trending again.
I was myself was in the same position. About mid way through July, I realised that my strategies where just not cutting it in this cycle and I set about on developing my forex strategies so they included one strategy for each cycle. Now I am comfortable trading and making pips in all market cycles.
So it is important to have a set of forex strategies that cover each of the market cycles.
You need to learn what the different market cycles are in addition to having correct trading systems. That means you should develop the skill of correctly identifying the different market cycles at the right time.
Once you have the skill to identify the market cycles then it is important to have set of forex strategies that will cover each market cycle. As effectively identifying the market cycles is a skill that all successful traders have mastered. You need to learn how to adopt your approach to those cycles to remain profitable.