The Cycles Of A Trend
It is often accepted there are four stages of a trend. These stages constitute a cycle and each cycle has smaller cycles contained within them.
It doesn't matter whether you want to trade with 5-minute charts or monthly charts. Each market will undoubtedly be in a few stage of the cycle when you are observing it.
Before you even consider engaging in a trade you ought to have some notion of where in fact the market is in the cycle. This can assist you to avoid making the incorrect entry. For instance, for those who have identified stage two of the cycle it generally does not make sense so that you can be short within an up stage.
The start of cycle (stage one) is where there's hardly any happening and the marketplace is normally flat. At this time the market is generally oscillating in a particular range. As this stage ends you often visit a breakout of the prior range. The breakout can frequently be explosive especially if it's been in consolidation for an extended period of time. For markets that may measure volume a rise of volume can be an early indication that the breakout is real.
Stage two is following the breakout has occurred and we commence to head North. According to the force of the move the marketplace may rally rather than get back to the breakout point or it could keep coming back and test that area.
The second indicate note is that the moving average begun to turn up following the breakout giving further support to the start of the cycle.
Stage two continues making higher peaks and higher valleys and could get back to test the moving average several times.
Stage three may be the final thrust of the cycle. You might notice a spike or perhaps a double top formation because the trend begins to perform out of steam.
This may be the final stage of the cycle as well as perhaps probably the most interesting. Based on market conditions some traders may now go short.
Stage four could be difficult because the market may either get into consolidation again or continue down.
So how do this help your trading? Well, the very first thing to accomplish before you enter a trade is decide where in the cycle you're. In case you are at stage two then maybe it's dangerous to go short. It might also be dangerous to enter short if stage two have been building for a long period. Remember the marketplace can't rise permanently.
On another hand if we were entering stage four you wouldn't desire to be long. Simply by identifying the various stages of the marketplace it can benefit you secure profits, make smarter judgments decisions on whether you ought to be on the market at all as well as perhaps offer you clues for entry and exits.