Market timing is one of the essential parts of investing. You should know how to identify when you need to get in and out of your trades. To do that, you have to understand what stage a given asset is in and then trade in the direction of the prevailing tendency. It may not be easy right from the start to figure out cycles. Yet, practice makes perfect, and you can utilize long-term charts to help you find out whether the market is going up, down, undergoing accumulation or distribution.
Whichever financial market you choose, stocks, commodities, currencies, or in our case, cryptocurrencies, they all undergo the same stages and have four major cycles: accumulation, mark-up (or advance), distribution, and mark-down (or decline).
As markets do not usually turn around in a single day, you often have enough time to spot how one cycle smooths into another. You may not be able to pick market tops or bottoms, yet as you practice, you will better identify a specific cycle in progress and make relevant decisions to buy, sell crypto, or hold. So, let’s take a closer look at each cycle and its specifics.
Source: TradingView
Accumulation – the time when the smart money keeps on buying
When the accumulation cycle begins, the market starts bottoming out. Although buying when the prices are falling is dangerous, smart money usually operates in billions of U.S. dollars and does not buy the bulk of their position in one go. No, they gradually accumulate their line of positions not to cause spikes in prices. So, they start buying when the prices continue falling. Yet, their bullish presence slows down the fall.
At this point, the market sentiment is extremely bearish; the media delivers only negative news and spreads fear of even deeper recession and lower prices, making outrageous predictions that some assets may go down to zero. They often stated that it would happen to bitcoin, which never did, and probably never will.
Many retail investors and some institutional ones have sold all of their holdings by now or even shorted the market. However, for every disappointed seller, there would be an intelligent investor who sees the silver lining and buys because when the things are at the darkest, the prices are at their best for accumulation, and that’s precisely what vast crypto whales do; they buy.
Mark-up cycle – the rise in prices begins
The market sentiment starts changing from bearish to mildly bullish at this stage. The decline is over, and the prices start moving up by making higher highs and higher lows, which clearly shows that the uptrend is in progress. It attracts a crowd of speculators, trend followers, and retail investors who want a piece of the move. So, they start buying too.
Media starts delivering more positive news about the markets, even though the economy, in general, may still be in recession. Market novices should remember that economy and job sector are the last to experience the recovery as the money first flows into financial markets and last into the economy.
As the prices keep rising, the greed to earn more and the fear to be left behind dominate the phase. Some traders buy on dips, others on breakouts of previous highs, and so the move upwards starts accelerating.
As the uptrend gathers pace, a market sentiment often transforms into hysteria. Everybody is buying, and the dips are minor, while the peaks are crashed faster. That’s when the smart money starts unloading their positions. With each new peak comes more significant selling pressure as early investors lock in their profits. The advance slows down, and the prices often get somewhat choppy due to the selling pressure from the market whales and the latecomers who think that they can still make a killing.
Distribution cycle – market bears take control
It is the stage when the sentiment shifts from bullish to bearish as the sellers start dominating the market. For some time, the prices can fluctuate in ranges till the top is finally made. As market tops typically form faster than bottoms, the turnaround can happen as quickly as a month or even a few weeks.
Traders can wait for confirmation about a market shift that may come in the form of some technical chart pattern, for example, double or triple top, head and shoulders, a descending triangle, etc. When the patterns are confirmed, the decline can be quick and dramatic. It is a fact that market bears can destroy in a month, what the bulls have created in three. Thus, downtrends develop much faster and end sooner.
As the decline is often rapid, investors who did not lock in their profits earlier are sitting on break-even, or even at a loss, and think they can wait it out. To their great surprise and disappointment, the prices continue falling, and many investors find themselves under the water, scrambling to cut their losses. Fear and despair dominate the market and bearish pressure on prices cause many investors to throw in the towel and exit, sometimes with huge losses.
Mark-down stage – total capitulation and a new accumulation cycle
It is the stage when savvy investors start accumulating their long positions again. It is the period that might be called ‘all hope lost’ for most investors who still clinch to their long positions that are in the red. Unable to suffer more profound losses, they will likely close their positions right before the market bottoms out.
And so, the complete cycle of four stages starts again. Those who have learnt their lesson will look for signs of market bottoms, which might come in the form of chart patterns such as the double-triple bottom, inverted head and shoulders, ascending triangle, etc. As the mark-down slides into an accumulation stage, we can assume the downtrend is over, and the initial phase of an uptrend begins. Rinse and repeat.
How long do financial market cycles last?
There is no pre-set timing for each phase or how long the whole cycle will last. A lot depends on your perception of the time frame you will trade them. Day traders may see the complete cycle happen in a few days, while a long-term investor will focus on a two-three-year horizon for an uptrend and a year for a downtrend. Yet, the timing is preliminary and can change from year to year.
Key Takeaways
Financial markets, just like anything else in life, have cycles. Any action equals reaction. Similarly, anything that rises will eventually fall and vice versa. Thus, markets will always have their uptrends which will consist of accumulation and mark-up phases and downtrends that will comprise distribution and mark-down phases. Savvy investors will buy during the accumulation phase and hold till the prices begin stalling, forming peaks. Then, when they notice the first signs of the distribution phase, they will reverse and take a short position. They will keep their short position till the bears exhaust themselves and only then lock in their profits. Then, they will wait for the accumulation phase to start. And so the game continues, hopefully till infinity!
For information purposes only. Not investment or financial advice. Seek professional advice. Digital assets involve risk. Do your own research.
