A significant part of any traders'forex strategies is understanding industry cycles.
So what are market cycles?
Being unsure of what market cycle you are in will affect your forex trading. Knowing the right major market cycles is very important to you and which forex trading system you should be using. As each cycle requires a different approach from your own forex trading system. foreign exchanges
You can find three major market cycles and the ability to adapt to each cycles is an important part of one's forex strategy and will boost your profitability.
So you need to understand how to determine industry cycles if you wish to become a successful trader.
The three major cycles are:
1) Trending
2) Consolidation
3) Breakout
The Three Market Cycles
It doesn't matter what financial market you are trading, industry can only just move in these three cycles.
A common saying amongst forex trade is "The Trend is your friend."
Trending Cycle
Trending is when industry price moves in exactly the same direction consistently in a single direction either up or down.
What sort of forex market trend is inherently defined? A trend can be defined as progressively higher lows and higher highs.
Of course if the cost movement contains a direct line either up or down, then identifying a tendency would obviously be very easy.
In true to life, currency prices move don't move in one direction consistently, so denying forex traders and easy trend read.
Consolidation Cycle
A Consolidation cycle also known as Non Trending or Ranging market, which looks like a sideways / horizontal distinct bars on a chart. Consolidating is when industry is struck between two horizontal support and resistance levels and cannot break these support / resistance levels for at the least seven bars.
You can use moving averages or other technical indicators to find out whether industry is consolidation or trending. In case there is a consolidating market, the moving average line will almost be horizontal.
Breakout Cycle
Now what is breaking out of a Consolidation? After industry has been consolidation for at the least 7 bars and then the price sharply breaks from this ranging market sharply to create a new high or low.
That is basically it for the cycles
So how exactly does this affect your forex strategies...?
Many forex traders only have a forex strategy for one or two market states. The most popular forex strategies being Trends and Breakouts.
But recent research indicates that typically the forex market is in a trending cycle about 30% of that time period, breakout cycle about 10% of that time period and Consolidation for 60% of the time.
So if your only forex strategy is for a trending cycle then you definitely will simply be trading for 30% of that time period and if you are one of many few that have multiple forex strategy with common being the trending and breakout strategies, then you definitely will still be trading only 40% of the time.
This implies you will be sitting on the sidelines for approximately 60% of the time. Whilst it is always important to have the patience to hold back and pick high probability trades, awaiting industry to alter cycles because you do not have a forex strategy for this cycle doesn't make sense.
Some forex traders will then get sucked into making trades with the wrong strategy into market cycles that the strategy just will not work in.
This year in the July and August industry spent nearly all its amount of time in consolidation and breakouts with not many trends happening. A lot of traders I know only did not have a strategy for this kind of cycle so they either lost money over these months or stopped trading altogether before the marker started trending again.
I was myself was in exactly the same position. About mid way through July, I realised that my strategies where not cutting it in this cycle and I start on developing my forex strategies so they included one strategy for each cycle. Now I'm comfortable trading and making pips in all market cycles.