Forex market cycle

The idea behind Market Cycle is nothing new. It was discussed and explained at length by Charles Dow in the early 1900s. Dow wrote of three market trends: accumulation, mark up, and distribution. Accumulation is a quiet, narrow ranging sideways market while distribution could be considered its cousin since it is also a sideways market cycle but more volatile and wider ranging. Mark up is simply an uptrend. Dow wrote about the stock market and thus his theory of market trends has a bullish bias. For forex traders we will add a fourth cycle: Mark down or a downtrend.

On any given day, the trend of a shorter term time frame could be up while the daily trend could be down. The EUR/USD is a perfect example of this. Notice that the 15 minute chart of the EUR/USD was in an uptrend for most of the Monday trading session. It did subsequently correct this move higher and is currently trading at 1.3630.

All the while the 15 minute was trading higher, the daily EUR/USD did little to change the direction of the overall downtrend (mark down cycle).

Here is an example where if a trader did want to seek out a buy entry on the EUR/USd and follow a short term trend shift, the 15 minute time frame could have helped set up such a trade. The daily chart – in sharp contrast – is firmly with the bears as prices continue to test the downtrend resistance at the 34ema low and makes new lower lows as seen by the March 3rd 1.3619 low.

By viewing the same pair but across different time frames the longer and short term view of market opinion can not only be identified and separated but also potentially traded.

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Note: As with all major economic releases there could be significant price volatility with this announcement. Currency spreads will typically widen just before the release and will remain wide for a few minutes after. If the announcement is a shock to the consensus estimate, the price of the currency pair could gap significantly. For example, the price on the EURUSD trading at 1.2820 – 1.2822 just before release could gap up 60 pips to 1.2880 – 1.2882, without any available prices available between the price of 1.2820 and 1.2882. A Buy Stop placed before the announcement at 1.2830 would turn into a Market Order and would be filled at the prevailing price 1.2882. The same would be true with a Sell Stop.

Basically, plan on the spreads widening and if you are trading with a Buy or a Sell Stop entry order, do not anticipate being filled at your entry price. You will be filled at the prevailing market price after the release, and this market price could be significantly different from your desired price of your entry order.

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