Understanding how market cycles work is key to helping investors and traders reduce risk and maximize returns in their crypto portfolios. Let’s dive into the 4 market cycles that every asset experiences and the emotions and trends associated with each.
What are market cycles?
Market cycles refer to patterns and trends that emerge during various stages of expansion or contraction. For instance, a Markup Phase is a bullish market cycle where people tend to be optimistic and greedy, leading to a strong buying trend. The other 3 major market cycles can also cause investors to have certain feelings and act in certain ways.
Different types of market cycles
Accumulation occurs after the market has bottomed and the innovators and early adopters begin to buy, figuring the worst is over. Weak hands have sold and smart money is buying in.
- During Accumulation, market sentiment is moving from negative to neutral.
- Smart investors are buying the dip and enjoying the asset’s lowest price.
- Each Accumulation Phase marks the beginning of a new market cycle.
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The Markup Phase occurs when the market has been stable for a while and moves higher in price. It can also be referred to as a Run-Up Phase or a Bull Market. This is when you see technical analysts buying into crypto projects and an early majority entering the market.
- During the Markup Phase, the market starts to reach higher highs at an increasing rate.
- Market direction is clear and overall sentiment is optimistic.
- At the end of this phase, FOMO is running high, causing an increasing number of investors to buy at the top and pumping volumes. Smart money begins selling.
During this 3rd phase, sellers begin to dominate as the asset reaches its peak price. Bullish sentiment is changing to mixed sentiment and price momentum begins to slow.
- Watch for the Classic TA patterns like head & shoulders during this phase, indicating momentum change.
- Smart money has exited and the market sentiment becomes filled with anticipation and fear.
- The Distribution Phase ends when the market reverses its direction.
As the last phase of the market cycle, a downtrend occurs when the asset price is tumbling downward. Also referred to as a Run-Down or Bear Market, the downtrend is a challenging time, especially for newer investors whose emotions are often running high.
- Those that ignore the existence of market cycles suffer the most during the downtrend.
- Emotion-based trading decisions during this phase result in selling too late (or not selling at all).
- Social media pumping increases despite the downtrend’s imminent arrival as a last ditch effort to keep the price pumping.
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Understanding the market psychology
Now that you know what the cycles are, it’s time to learn how to beat the cycles and use market psychology to your advantage. What’s important to understand is that crypto markets act in a very counterproductive way:
- The best time to buy an asset is usually during the Downtrend Phase when the sentiment is hopeless, or during the Accumulation Phase.
- The highest financial risk often comes when market participants are overly optimistic and euphoric, such as during the ending stages of the Markup Phase.
This is the psychology of the market cycle and knowing about it is the first step in beating it. Traders and investors can try and read the market sentiment by spotting the varying market cycles. For example:
- They can try to buy when there's negative sentiment or feelings of panic during an Accumulation Phase.
- Or, they can try and sell when fear and greed are at their highest during the end of the Markup Phase.
Get the edge you need with Quadency
Lucky for investors, Quadency offers a number of strategies to monitor these market cycles and automate trades to capitalize on market sentiment, including:
- Easily configure a MACD bot at Quadency to track momentum, identify buy and sell signals, and automate trades.
- Quadency’s Grid Trader automates the popular grid trading method that is used to profit from market volatility during buy low/sell high cycles.
- The Multi-Level RSI bot automates buys for traders when the price dips below RSI levels and averages down by buying more if the price continues to drop. The bot sells for you when the profit target or stop loss level is reached.
- Not sure about all of the above and just looking to invest in a crypto asset over time? There’s a bot for that! Simply use the Accumulator to dollar cost average (DCA).
Be sure to sign up for your free Quadency account today and make the market cycles work for you!
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Disclaimer: The content of this article is for general market education and commentary and is not intended to serve as financial, investment, or any other type of advice.