Cycles can be found all around us, from changing seasons to different periods of our lives. Numerous factors influence these cycles at different stages. Similarly, market cycles have an impact on stock fluctuations. Understanding how these movements operate can aid a trader in spotting fresh trading opportunities and reducing risk.

The stock market’s price fluctuation can appear random and difficult to monitor at times. Prices may rise on certain days and fall on others. These pricing changes might be perplexing to the typical individual, and the prices can resemble a casino game.

The reality is that stock market cycles follow similar patterns and go through comparable periods. The markets will no longer appear random if an investor understands the phases. The trader can identify each phase and adjust their trading technique accordingly. The stock market cycle is divided into four stages:

1. The Accumulation Phase

This stage of the stock market might apply to a single stock or the entire market. As the name implies, this phase has no discernible trend and is characterised by agglomeration. As traders collect their shares before the market ‘breaks out,’ the stock tends to drift in a range. Because the accumulation phase follows a downward trend but precedes an uptrend, it is also known as the basing stage.

Because the market is not currently following any particular trend, the moving average does not provide a clear indicator. The stronger the break out in the market when the equities start to trend, the longer the accumulation phase.

How Should I Trade?

The accumulation phase of the stock market cycle might span anywhere from a few weeks to several months. So take advantage of this opportunity to research the business and plan your entry. The price range is narrow at this time period, making day trading difficult. It is best not to make major trades until a market trend has been proven. As you start to see an uptrend, a current event in the economy can take stock of this period.

When the accumulation phase of the market is broken, the market begins to see highs and lows as we move into the run-up phase.

2. The Run-Up Phase

The run-up phase of the stock market cycle is defined by the price going above this resistance level, just as the accumulation phase is defined by its resistance to changes in stock prices. The breakout of the accumulation phase results in a large volume of shares being purchased by traders who were silent during the accumulation period. As time passes, we begin to notice a pattern in the prices. As traders begin to invest, the market’s highs and lows draw them. As the market grows stronger, this results in an upward tendency.

How Should I Trade?

Now is the perfect moment to make money as a trader. Prices are moving rapidly upward, which is ideal for momentum traders. Any downward trend during this time is seen as a chance to acquire shares rather than a negative trend. When the market falls, the shares will be purchased as the market resumes its upward path. Swing and short-term traders benefit from the run-up period. As this phase proceeds, the market’s volatility reduces as prices move more slowly each day.

3. The Distribution Phase

Traders who bought stocks during the accumulation phase begin to exit the market during this phase of the stock market cycle, also known as the reversal stage. This phase is marked by an increase in the volume of shares but not in their price. The market is normally positive, but demand for shares does not always outnumber supply, causing prices to rise. Hard sell-offs are common, but not enough to cause the market to trend downward.

How Should I Trade?

As investors begin to exit the market, there is a lot of volatility in the early stages, which gives an excellent shorting opportunity. Once the market strikes the bottom, it will bounce back with vigour. Certain chart patterns, such as the head-and-shoulders top or bottom top, indicate the distribution phase. The market loses its volatility as the phase proceeds, and a range begins to form. For momentum traders, this is a bad position.

4. Decline / Run-down Phase

This is the final stage of the stock market cycle, and most investors are losing money. Traders who bought equities during the distribution period strive to sell quickly since they are losing money. However, few purchasers are available to match the demand for shares. Stock prices fall as a result of the lack of demand. Higher lows in the market for an extended period of time indicate that the market is approaching the accumulation stage.

How Should I Trade?

Stock prices fall lower than predicted during this phase, so ‘don’t try to catch the falling knife.’ If the correct tactics are employed, a bear marker might present a fantastic chance for long trades. It is critical not to panic and sell during this time, as these stages do not endure indefinitely.