Entering the Market: 2. Context
Importance of the Market Cycle
The first question a Professional asks before entering a trade, is:
“What has the Market done?”
We discussed the answer to this question in the previous post here. This helps the Professional understand the Market Condition. Remember the market is constantly searching for value within support and resistance.
The second question a Professional asks before entering a trade is:
“What is the Market trying to do?
The answer to this question explains the Market Context. Before a Professional places capital at risk, they want to know the structure of the market.
Markets are either consolidating around value or searching for value. This we learn from the Market Condition. The bottom and top of a value range are Support and Resistance. This is where the long term buyers and seller live.
Market Cycle Defined
All markets rotate through a Market Cycle based on the Market Condition. The market cycle starts with a Trading Range. This is an area of consolidation around perceived value. Later the perception of value changes higher or lower, a Breakout occurs. The energy necessary to breakout of the value area is like a rocket going into space. It must break free of the current value atmosphere. The breakout is so forceful that several bull or bear bars will repeat in a Spike. The spike will run out of steam and a Pullback will occur. The pullback is a resistant point where Professionals take a first target. The pullback will reverse to a previous support level. The breakout, spike, and pullback form an ABC Channel pattern and this begins a bull or bear channel. A channel is a range between support and resistant that the market will search for value higher or lower. Multiple pushes within the channel will move the market toward the perceived value . Eventually, the market will find value and the Channel Widens. This widening creates a consolidation around value and a Trading Range forms.
Market Cycle
Trading Range (TR)
Breakout (BO)
Spike (SP)
Pullback (PB)
ABC Channel with multiple pushes (CH)
Channel Widensn (CW)
Trading Range (TR)
Why is a Market Cycle Important
A market is always at one of these seven stages in the Market Cycle. This is the Market Context. What makes this important? Each of the seven stages in the market cycle are the entry and exit location for Professionals. Want to trade like a Professional, then memorize the market cycle.
The Market Cycle confirms where you are and what the market is trying to do. It also shows you what to anticipate.
The next post will discuss how buying and selling pressure impact the strength of the market. And show a simple way to determine any markets current strength. Professionals increase their probability of success by knowing the strength of the market. And so can you.
If you want to learn about this and more I have two resources for you:
- Online Course: Trade Like A Pro (TLAP) course. Learn to trade like a Professional at your own pace. Read the testimonials here.
- Group Coaching: Join the Mastermind Group and get the TLAP course for free.
Be well and trade like a pro,
Lloyd
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