Market cycles and how to incorporate them into your trades

  • By Harrison Cole

  • September 20, 2018
  • 7:00 pm BST

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It is a common practice to follow the market cycles as each year presents them and set up trades accordingly. Traders do this every day on smaller scales, following the economic calendars provided by forex and CFD brokers.

The markets change each year according to cycle systems. Each cycle is influenced by large and small economic and global news, such as the 2016 US presidential election, which drew a lot of attraction toward American stocks. Can these cycles be used as a strategy for your trades?

The logic behind it all

As with any system, the market cycles work according to a type of logic and methodology. Although there are cycles that work according to lunar phases, more substantial logistics might prove more reassuring.  You can take the presidential election as an example. The logic behind this motive for a changing cycle is that the economy reflects the efforts of the running candidates. The associated administrators therefore work toward creating an economic surge connected to the candidate. This naturally drives the stock market’s success until the elections are over. This might not always be the case, but it reflects how political events affect the markets directly and influence market cycles.

Analyzing the data

 Before following any such arguments of potential market conditions, it is vital to study the data that the system provides. If you continue looking at an election year as an example of a market cycle, you would need to compare the market performance of every previous election year and study the similarities and differences. If the markets did well in 17 of the last 21 election years, it reflects high potential. However, even in such a case, the volumes used in these statistics are low and not entirely reliable.

Before investing money based on such minimal information, you should take the time to study all years, the different events in cycles, and as many studies as you can. Then you can compile the final outcome to provide a strategy, just as you would with forex trading or any other market analysis. It is also vital to look beyond just successful performance. In order to gauge how the economy did overall, you need to assess the average annual returns of each year and see how they compare in terms of percentage. A promising event in the cycle does not always ensure good long-term results.

Well-supported market cycle systems

 There are several factors that affect the systems of market cycles. One of these is the momentum effect in markets like stocks and forex, whereby traders needs to speculate future outcomes when placing trades. If price action has been moving in a certain direction constantly over a period of time, there is a high possibility that the trend will continue. Studies have been conducted over many years to prove the effectiveness of these trend-following cycles.

Another effect on cycles is what is known as the “Monday effect”. This is the idea that stock prices tend to rise drastically on a Monday, at the start of the market week. Traders following this cycle will place trade positions on stocks early as the prices start to rise. Alternatively, a “Friday effect” also exists, which is backed by the fact that in the forex market, interest charges occur in the middle of the week, which affect prices throughout the week until Friday. It is also widely known that most traders close their positions on a Friday before the market closes for the weekend, creating a consistent market cycle.

Keep in mind that these are only a few types of market cycles and their systems. Many others exist and can be used to aid strategic trading. It is, however, vital to carry out extensive research and studies before committing to a cycle and placing trades on good words alone.

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