Page 47 - Trading #101 Course – Part One: Trading Basics

TRADING #101 COURSE – PART ONE: TRADING BASICS /2017-10-06

Chapter 7:

Adapting to Changing Market Cycles

Just as most climates have four seasons to one degree or another, the markets have
different environmental cycles. This means you need to quickly identify the changing
cycles and then appropriately adapt to them.

If you live in New York City, for example, chances are you will not be going outside for a
leisurely stroll down Fifth Avenue in shorts and a T-shirt and flip-flops in the month of
February. Why is that? Because, if you’ve lived there for a while and experienced the
local seasons, you’ve already identified that in February it will be darn cold. To
appropriately adapt, you will want to wear a heavy winter coat and maybe gloves and a
scarf and earmuffs.

It is the same with the markets. You need to have “lived there for a while” and
experienced a variety of market cycles so you know what “to wear,” or rather how to
adapt, so that you are financially comfortable.

Instead of knowing to wear a winter coat in February, you will know that in a choppy,
sideways, bracketed market you need to adapt your system and rules so that you do not
get whipsawed and stopped out a lot. Or you may need to recognize a bull market
changing to a bear market so that you can exit your position in a timely fashion to lock in
profits.

Four Major Market Cycles

There are four major market cycles that you need to learn how to correctly identify.
Each market cycle requires a different approach from your trading and investing system,
and adapting to market cycles can improve your profitability dramatically.

Examples of the four major market cycles:
1. Trending. A trending market is moving consistently in one direction, up
or down.

2. Consolidating. Also known as bracketed, this is when the market is
stuck in a price range between identifiable resistance and support
levels; on a chart, it will look like a sideways horizontal band

3. Breaking out of a consolidation. This is a sharp change in price
movement after the market has been consolidating.

4. Corrective. This is a short, sharp reverse in prices during a longer
market trend.

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