Forex markets are not always trending. Thanks to disparity in trader’s behavior, in response to various developments as well as news releases, the currency market experiences different cycles. The cycles tend to repeat themselves, giving rise to a multitude of trading opportunities for traders and forex robots.
Therefore it is essential for traders as well as automated trading systems to have a clear understanding of the different cycles in the forex market. In addition to trading cycles, it is crucial to understand the equilibrium point of each security in the market.
Equilibrium is essentially the current market price that a currency pair should trade. Equilibrium allows traders as well as forex expert advisors to identify entry and exit points. Likewise, one can open long positions when the market price is below equilibrium and short positions when the price is above the equilibrium.
Below are the four forex cycles that any trader should have in mind while trading currency pairs.
Cycle 1: Range-Bound
Range bound is a forex cycle that sees currency pairs fluctuate between two well-defined levels. In this case, price tends to fluctuate between highs and lows of the day that act as support and resistance levels. In this cycle, whenever bulls try to raise price above a given level, they experience strong resistance resulting in price edging lower.
Likewise, whenever traders or algorithmic FX trading systems try to push prices below a given level, they experience strong resistance from bulls, at support level, resulting in price edging higher. In range-bound markets, moving averages tend to flatten, given the lack of a trend.
Scalping, as well as swing trading, are some of the best strategies to deploy in range-bound cycles. In this case, traders or forex expert advisors open long positions at daily lows or support and short positions at daily highs or resistance levels.
Range bound cycles often lead to the breakout cycle.
Cycle 2: Breakout
While currency pairs are most of the time in consolidation or range-bound, once in a while, price breaks through support and resistance levels, giving rise to the breakout cycle. Whenever price breaks out of a given range, movements are converted into clear uptrend or downtrend depending on the direction of the breakout.
A breakout below a support level gives rise to a downtrend. Similarly, a breakout above a resistance level gives rise to an uptrend. Trend trading is one of the best strategies for trading breakouts. In this case, FX expert advisors or technical traders enter trades in the direction of the trend.
Conversely, when price breaks above a resistance level or daily high, one can look to enter a long position. Similarly, short position is ideal when price breaks below a support level indicating further downside action.
An important money-making hack when it comes to trading the breakout cycle is to ensure trades are only opened in the direction of the breakout.
Cycle 3: Consolidation
Markets don’t trend all the time after a breakout. Whenever price moves over an extended period, be it on the upside or downside, it reaches a point where consolidation becomes the order. When price peaks, price resorts to consolidation at peak level. In the case of a breakout on the downside, the price also reaches a trough level, where it can no longer go lower, resulting in a consolidation.
The peak and troughs level, in this case, become resistance and support levels, on exhaustion kicking in, after an extended period of trending. Just like range bound cycle, buying low and selling high would be an ideal strategy for trading the consolidation phase. This is because price would tend to rise and fall o price rejection at the peak and trough levels.
Cycle 4: Uncertainty
Once bull and bear runs are completed following a breakout, currency markets tend to face uncertainty. In this case, there is no clear direction for entering positions. In this case, it becomes extremely difficult for traders as well as automated FX trading systems to guess the correct course of action.
The fact that prediction is difficult even with the help of the best forex trading indicators, investors are often advised to stay away from the market in this case.
Forex cycles are essentially rhythmic fluctuation in price action that tend to repeat themselves with some degree of regularity. Price action in currency pairs occurs in cycles starting with price remaining range-bound for some period then breaking out. Breakouts are often followed by a period of consolidation on price moving in a given direction for an extended period. Consolidation is often accompanied by uncertainty in the markets.
Traders, as well as automated forex trading systems, should have a clear understanding of the different cycles to identify profitable trading opportunities in the forex market.