Markets are cyclic. All markets follow a pattern of upward, sideways, and downward movements. Market repeat these cycles; when one cycle ends, the next one will start. The market may stay longer on one phase, or it may transition quickly to the next phase repeating the cycle.
The market cycle comprises four phases: (1) Accumulation, (2) Advancing or the uptrend move, (3) Distribution phase, and the fourth one is (4) Declining. Markets repeat through these four phases, repeating one or more phases, forming a market cycle.
A phase can repeat within a cycle, or it can go through a quick transition. The important aspect is to understand the cycle and to know what phase the market is in so you can place trades in the market cycle's direction.
Accumulating
This is the start of a new cycle. It signals the end of the declining phase. This is the time the value investors take notice and go long. Look for trend reversal and confirmation signals before entering a trade.
General market sentiment during the accumulating phase is bearish. The market just came out of a declining phase and it has consolidated. It is difficult to figure out if the declining phase has completed; your best bet is to watch for trend reversal signals. Watch for the double bottom and other trend reversal patterns and confirmation candles before entering a new trade. Look for false breakouts during consolidation.
Advancing
Marker is in an uptrend, making higher lows and higher highs.
The market has established an uptrend. As prices go higher, the market will attract more buyers driving the demand and the prices up. Spotting the advancing phase is much easier. The market will move to make higher lows and higher highs. The market will exhibit pullbacks and price corrections. The smart monkey is waiting for more favorable prices to get in creating pullbacks in the uptrend move. The pullbacks are minor corrections as the prices go higher.
Distribution
End of the advancing phase. The market is at its peak and is consolidating; it will stay in a range or reverse to a bearish trend.
It signals the end of the Advancing phase. The market stops making higher highs and the bullish momentum declines. In the distribution phase, the prices will stay in a range where the bullish and bearish forces cancel each other. At the end of the distribution phase, you will notice the trend reversal patterns signaling a forthcoming bearish trend. The market is at its peak now and there isn’t enough bullish strength left to take the prices to go higher. Soon the sentiment will reverse, giving way for a bearish trend. Sometimes, the distribution phase may be a quick transition; in other cases, this phase can last very long.
Declining
The market is making lower lows and lower highs. The market has established a downtrend.
This is the last stage of the market. Selling pressure is high. Market sentiment is bearish. Some investors who have brought securities at the peak still hold on to their positions, waiting for a turnaround. This hesitation may create minor consolidation and pullback. The smart money may look for price corrections to enter at a better price. There is some buying interest from investors who are hoping for a turnaround. Unfortunately, the bearish strength is too high to overcome, and the market continues to fall, making new lows. The bearish trend will subside once the selling stops and the value investors take over. This signals the end of the market cycle. A new market cycle will begin from here with a new accumulation phase.
The daily chart for EURUSD shows accumulation from April to June, then a stretch of advancing during June. From the end of June till the beginning of August, EURUSD was in re-accumulation. It continued with the advancing phase until it reached its peak at the end of August. The distribution phase lasted for a month. After consolidating, the trend reversed. The cycle progressed to the declining phase.
Redistribution and Re-accumulation
Two intermediate market stages. Market correction or pullback can cause a period of consolidation during the advancing and declining stages. These pauses are re-accumulating and redistribution phase.
The market will continue in its original trend after a brief period of consolidation. You may not see this consolidation all the time, or it may be present only in a smaller time frame. Take note that the bearish or bullish strength present in the market is still strong; the market is not ready to reverse its direction. These consolidations are minor and differ from accumulation. It is not a major cycle as the volume is still high, showing strength in the direction. The bearish or the bullish trend will soon overtake and the market will continue in its original declining or advancing phase. The intermediate phase could be that some early positions are liquidated but the market sentiment is still strong tipping the market again in its original direction.
How to find what phase the market is in?
Use EMA to measure market convergence and divergence. In the accumulation phase, the market is at its bottom. The market will converge to its EMA. In the advancing phase, the market will go higher, leaving its EMA behind. Depending on how long the distribution lasts, the EMA may stay below or the market may converge to its EMA. During the declining phase, the market will diverge down from its EMA. As the market trends downward, it will move further downwards from its EMA.
I use an EMA of 14 and 96. Do your own experiment to come up with an EMA that gives you the proper direction and state of the market.
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