Forex Trading Cycles
We are raised to see the concept of time as a linear flow. When we put it simply, that means we divide time into the past, the present, and the future.
The nature and the events in our lives and artificially created approaches shows us that we should not see the flow of time in a linear way, but cyclically.
Let’s mention a couple of examples that make this statement considerably relevant. One great example is the changing of the seasons. Our lives happen in cycles as well, because we experience good and bad life periods that alternate.
And if we look at life outside of the context of our own existence on this planet, we’ll see that the cycle of life consists of microcycles and that those microcycles are our individual lives.
There are plenty of cycles to be found outside of lives, for example in nature and other places; there are countless cycles. But we’ll focus on those that can influence the trading accounts of all traders.
The most relevant one is a cycle that can impact a trader’s trading account significantly: the trading cycle .
The trading cycle is the alternating of economic growth by falling and the other way around. This type of cycle is a fundamental element for increasing or decreasing the money supply.
Generally, the more currency is in circulation (of the market), the more the value of it decreases (investors and traders with real currency contracts are losing) and the forex market usually responds to this phase of the cycle by increasing the selling of the currency.
When the country’s trading cycle is flourishing, the international flow of capital grows. The growth of capital flow results in an appreciation of the country’s currency. Contrarily, if a country is in the economic crisis phase of the trading cycle, the international flow of capital falls and the value of the currency decreases.
Every day, the markets receive false reports about in which phase of the (short-term) economic and trading cycle the countries are. Traders who can correctly determine in which phase the countries are, have a great advantage to potentially succeed, unlike those who can’t.
The cycles and phases of the currency market
Every financial market usually has three cycles. These 3 trading cycles are:
The trend cycle – the markets are in this cycle when the value of the currency is steadily growing or falling. In this cycle, the market creates more and more new highs when growing, or more and more new lows when falling. The correct determination of this cycle can be quite tricky because it usually cannot be connected by a straight line, which is the most suitable way to determine this cycle.
Trend strategies are the most efficient in this currency cycle. With the right settings, their success or failure rate could even exceed 50%.
The consolidation cycle – in this cycle, the markets are indecisive and the value of currency basically stays the same. This phase typically does not create new lows or highs, which can be seen in a chart.
Trend strategies are not as efficient in this phase (they often result in losses).
Professional traders usually don’t implement trend strategies in this phase. They use more suitable strategies for sideways trends.
The breakout cycle – it is the phase between the consolidation and the trend of the market. The markets are slowly beginning to show the new direction of the trend and the development of the value of the currency.
Experienced traders often wait for a confirmation of the breakout because there are many false breakouts in this phase. When a trader learns to determine a breakout correctly, he can use the full potential of trend strategies, which can bring him great carried interest.
Every trader needs more than one successful strategy
Market cycle research shows that the forex market is in the trend cycle only a third of the time. It is in breakout at least 10% of the time, and the consolidation cycle is the most common market phase.
It may seem the most beneficial to trade strategies that are suitable for the consolidation cycle. But you have to realize that the markets aren’t as volatile in this cycle as in the trend cycle.
We can’t say that it is more beneficial to trade one strategy over the other. The experienced traders can precisely determine the individual cycles and they choose their strategy only after they’ve determined the current cycle.
In trading, just like in life, we need to make compromises every now and then. And that is why every trader should consider whether it’s better to use only one strategy and know when to trade and when not to trade, or to use various trading systems and be able to trade in every market cycle.
About the Author
Team Purple Trading
Purple Trading is a true and 100% fair ECN / STP forex broker providing direct access to the real market. High speed orders execution, no trade-offs, no limits for any type of trading, the most advanced trading technologies. Explore more about Purple Trading at www.purple-trading.com .
P.M. Purple Trading is a trade name owned and operated by L.F. Investment Limited., 11, Louki Akrita, CY-4044 Limassol, Cyprus, a licensed Cyprus Investment Firm regulated by the CySEC lic. no. 271/15.