The market is never still. The price moves up and down. Often it is very difficult to predict where it will go next. And this prediction is the basis of trading. Opening and closing positions according to what traders believe will happen with the price of the underlying asset. There are so many factors that can influence the price direction. But, there is some kind of pattern the market follows. And so we can recognise 4 market phases.
4 phases in the market cycle
Although the market frequently behaves unpredictably, it is possible to observe some repeatable market cycles. Each cycle consists of 4 phases. And these phases are the accumulation phase, the advancing phase, the distribution phase and the declining phase.
The accumulation phase
In the stage called the accumulation phase, the price behaves like in the ranging market in the downtrend. The support and resistance levels can be drawn on the chart. If you attach the 200-day moving average, you will notice how it flattens and the price moves around it.
This phase happens after a long downtrend. The fall in the price could last even longer than 5 months (when using the daily timeframe). The end of the phase is marked by breaking the resistance line.
The advancing phase
After breaking the resistance, the price moves upwards. It forms higher highs and higher lows. Our moving average with the period of 200 will also rise, and the price bars will develop over its line.
When the uptrend is exhausted, the advancing phase is coming to an end.
The distribution phase
The upwards movement of the price can be very long, even more than 5 months (on a daily timeframe). Eventually, it weakens and ceases. And the market is entering the distribution stage where the price behaves like in the ranging market during the uptrend. Again, you can draw the support and resistance levels. And the MA200 flattens and the price fluctuates around its line.
This phase shows the fight between the bears and bulls. Finally, the support will be crossed and this will mark the end of the distribution stage.
The declining phase
The price broke through the level of support. It is now falling. Lower highs and lower lows are created. The price bars are developing below the moving average. The line of the MA200 also declines.
The declining phase will end when the downtrend gets exhausted, and so the market will return to the accumulation stage.
Some final remarks
Being able to read price action is an important skill for every trader. It is not always easy, and the market tends to go in unpredictable directions, still, we can distinguish 4 phases in the market cycle. Knowing them can help to make decisions about opening or closing trading positions.
When the market is in the accumulation phase, you can wait for the breakout of the resistance line to open a long trade. Then, in the advancing phase, search for opportunities to buy. You can trade pullbacks or breakouts. In the distribution stage, wait for the breakout and go short at the very particular moment or when the price draws back. Open transactions for the price decrease when you find a good moment for it during the declining stage.
Make use of the Binomo demo account. Take your time to practice identifying in which phase the market is currently in. Then, open the transaction according to what you have found out. When you feel ready to invest real money, start trading in the real Binomo account.