It is commonly accepted that there are four stages of a trend. These stages make up a cycle and each cycle has smaller cycles contained within them. It doesn't matter whether you like to trade with 5-minute charts or monthly charts. Each market will be in some stage of the cycle as you are observing it. Before you even think about getting into a trade you should have some idea of where the market is in the cycle. This will help you avoid making the wrong entry. For example, if you have identified stage two of the cycle it doesn't make sense for you to be short in an up stage. Stage One The start of the cycle (stage one) is where there is very little happening and the market is generally flat. At this stage the market is normally oscillating in a certain range. As this stage ends you often see a breakout of the previous range. The breakout can often be explosive particularly if it has been in consolidation for a long period of time. For markets that can measure volume an increase of volume is an early indication that the breakout is real. Stage Two Stage two is after the breakout has occurred and we begin to head North. Depending on the force of the move the market may rally and not come back to the breakout point or it may come back and test that area. The second point to note is that the moving average began to turn up after the breakout giving further support to the beginning of the cycle. Stage two continues making higher peaks and higher valleys and may come back to test the moving average a few times. Stage Three Stage three is the final thrust of the cycle. You may notice a spike or a double top formation as the trend begins to run out of steam. Stage Four This is the final stage of the cycle and perhaps the most interesting. Depending on market conditions some traders may now go short. Stage four can be difficult as the market may either go into consolidation again or continue down. So how can this help your trading? Well, the first thing to do before you enter a trade is decide where in the cycle you are. If you are at stage two then it could be dangerous to go short. It could also be dangerous to enter short if stage two had been building for a long time. Remember the market can't go up for ever. On the other hand if we were entering stage four you wouldn't want to be long. Just by identifying the different stages of the market it can help you lock in profits, make better judgments decisions on whether you should be in the market at all and perhaps give you clues for entry and exits. |
