The Market Cycle Concept is Powerful. What is the structure of the market? Does it have a structure. One way to explain this is the popular Elliott Wave but there is another way. It is much simpler and much much more objective. Originally taught by Al Brooks in his books. I love this concept and that is how I read markets now. Here I’ll present my understanding of the Market Cycle.
What is The Market Cycle?
The market remains in the following perpetual cycle.
The market will always be either a) TRENDING or b) RANGING
5 Concepts All Traders Must LEARN
To Understand the Market Cycle traders must learn these concepts.
- What is a Trading Range and How to identify it?
- What is a trending market and how to identify it?
- What is a Pullback and when to use it?
- What is a Climax, a climactic market or a exhaustion?
- What is a Trend Candle and what it means within the context?
- What is a Trend Line and How to Draw a Trend Channel?
- What is a Breakout? How many types?
In this article I am assuming that the reader is either aware of the simpler concepts such as Trend and Trading Range or can easily learn it by visiting www.babypips.com or Investopedia. I will focus on the rather novel concepts.
What is a Trend Candle?
The market is made of candles and bars. That’s how we see the market, a chart. One of the component of the Market Cycle is a particular candle pattern.
A trend candle is a candle pattern that indicates strength or weakness in the market. It is a candle that appears within trends or trading ranges. A trend candle can be used in various ways but its meanings change based on its position within trend or a trading range.
A Trend Candle on the current time frame is a strong bullish or bearish candle that has either no wicks or very small wicks on each side. 80% of more of the candle is made of a Bull or Bear Body. These candles are indication of strong bull or bear activity.
Fractal Geometry of Trend Candle and A Breakout Trend Phase with The Market cycle.
A trend candle of the current time frame might be a breakout on the lower time frame.
Breakout, Tight Channel, Converging Channels
The market cycle consist of various phases. The following is a chart of UK100 / FTSE100. What you see is the fractal geometry of the market cycle. On the right you see a 3 candle breakout. A breakout on a lower time frame will always be a TIGHT CHANNEL. In both cases it’s a Bulls-only market.
However, the third section of the chart is the Hourly chart. Here we have a trending channel that is converging to the right. So its swings are becoming smaller. I took this picture because I could predict with a degree of certainty that the next day will be something interesting.
Today, after the weekend, we saw the following chart. The Hourly chart had given us the heads up. The channel is broken with an outside bearish candle. After that it simply continued dropping.
The Market Cycle: Breakout > Trend Channel > Trading Range
This is a chart of DAX30 M1 Today the 11 of May 2021 during the London Session.
I posted the above in the chatroom. Later we saw the market created another kind of channel and then a trading range.
Blue Shows The BREAKOUT PHASE
The GREEN shows the Trend Channel (converging/Contracting)
The Zone channel and Red zone shows Trend Bear Channel and Trading Range.
90% of the time the market will remain either in a channel or a trading range. only 10% of the time the market will remain in the Breakout phase.
Breakout > Bear Channel > Trading Range
Breakout > Tight Parallel Trend Channel > Converging Trending Channel > Trading Range
Below I will show you 3 charts of FTSE100 from 11 of May 2021. The M5 chart is the one I traded. Pay attention to the breakout and how it turned into a trading channel and eventually a Trading Range. This happens ALL THE TIME.
Trading Ranges, Trends, and Momentum
The market is either trending or range. Likewise, a candle is either a trending candle or a range candle. The trend candles have smaller wicks and bigger bodies. The range candles have bigger wicks and smaller bodies.
There are only 2 Types of Candles and 2 Types of Markets
I will always be aware whether the market is in a 1 minute or 5 minute or hourly time frame range. I will be aware of those ranges within ranges and I will keep an eye on the levels.
Keep it BINARY to Help Make Decision Making Easy
I will keep it BINARY: At any given point
- A Candle is Either a Trend or a Range Candle
- The market is either in a trend or range
Questions to Ask: Is the market in a trend or a range?
Use pullbacks ONLY when market is Trending
Use Reversals ONLY when market is Stuck within clearly defined range
And USE Pullback Entries and Trend Trading MORE than Reversals.
DO NOT SCALP unless it is time for scalping (which is almost never)
A Breakout / Momentum Phase (green) followed by a bear trend (a trend channel) and then A Trading Range.
A Tight Trading Range on the USDJPY Hourly Chart.
The Market Trends in 3 Ways
- Breakout Phase (Momentum with Trend Candles no Pullbacks)
- A Tight or Wider Trending Channel (Small Pullbacks)
- A Very Wide Trend Channel where both bulls and bears could make money.
The Market Remains in Two Types of Trading Ranges
- A TIGHT Trading Range or what we call the Tight Boxes (Nobody can make money here, Do Not Trade.
- A WIDE (Tall) Trading range where the distance between the Support and Resistance is wide enough for both bulls and bears to make money.
A Breakout – A Tight Trend Channel and Trading Range
Let’s look at this chart of NASDAQ100 on the 5 minute time frame. I have marked the parts where the market broke out into a trend. The blue shaded area is the Breakout Candles. On a higher time frame, this will be just 1 or 2 Trend Candles. On a Lower time frame, it will be a series of trend candles with smaller bear candles i.e. a tight trend channel.
It did not actually turn into a trading range it turned into a Bear Wave within an Up trend. Followed by Breakout Up Again.
A Wider Bull Channel
Sometimes we see wider channels within big bear and bull waves. Both sides can make money even though its a bull trend, because its wide enough.
The Market Either has A bull Wave or a Bear Wave
When the market is trending the bull wave is often bigger than the bear wave and vice versa for bear markets where bear waves will be longer than bull waves.
When the market is in a trading range the bull and bear waves will have equal lengths but it will also have the following
- A Bull Move/Wave/Leg within a Trading Range, A Pullback within a Bull Leg within a Trading Range
- A Bear Move/Wave/Leg within a Trading Range, A Rally (inverse pullback) within a Bear Leg within a Trading Range
The following chart of the US30 Hourly time frame shows a very wide trading range. I I bought the lows and sold the highs several times until the last sell trade failed and it later turned into a 3 day up trend. (all time highs again)
We also saw a bear trend channel within a trading range. It was possible for both bull and bears to trade and make money during the trading range and inside this bear trend channel
How to Trade The Chart is in a Trending Phase
When the Hourly chart is trending I will NOT take swing trades against that trend when trading the 5 minute chart but I can take scalp trades against the hourly trend.
When the Hourly chart is in a wide range like it was on the NASDAQ and US30 during the last 2 weeks of April 2021, I will sell the highs of the range and buy the lows using the levels on H1 and price action on the 5 minute chart.
E.g. example these trades
Buying and Selling Wider Trading Ranges on the M5 Chart
NASDAQ 100 Post NFP Wide Range
https://www.screencast.com/t/LBq0qXcOJ
When NOT to DRAW Your Trend Lines?
Trend Lines are simply of mapping your way. It does not mean that price will 100% respect these lines. You’re only creating a pattern with the help of drawing some straight lines.
Use trend lines ONLY during Bull and Bear Trends. To see if they are
a) Parallel or b) converging.
The idea is that you want to see this
- A Range Bound Market either in a Tight or Wider (horizontal channel) RANGE.
- You will see (often) a Breakout (which means series of similar colour candles no pullbacks or very small pullbacks creating a very tight trend channel)
- After that you will often see a few candles pullback 5-10 candles is fine. Or you will see continuation by the channel will converge. The breakout of this type of channel often leads to a good trade in the opposite direction.
Don’t Draw Trend lines when you can see its a RANGE. Just Draw the horizontal lines and consider it a range.
Below is a Chart of NASDAQ 100 M5 on 10th of May 2021. The Market has been slow today and all the indices have done at at least 3 Bullish Days.
I am long on the Nasdaq and Ger30 at this moment. The Nasdaq 100 is in a sideways RANGE rather than a channel.
Don’t be too pedantic – Perfection Does NOT Exist
The following chart shows the chart template with KC on it. I’m making the point that you don’t look for too cute or too perfect signals once you have a pullback scenario. Enter any of the marked areas on the following chart.
How to Trade – Momentum Breakout – Trend Channel and Trading Range
Screenshot from the Video Above
A Trend Trend Day
Some days the market moves in one direction. It is what I call the trend trend days. (something I learned from the Bella of SMBCapital)
The following chart shows a Trend Trend Day. I have marked the initial Breakout. This is where momentum traders laugh. Momentum trading opportunities exist but only for brief periods. mostly it happens right at the open or at major news. Scalpers love momentum.
When you find a Single Direction Trend Day You have to make money. You must finish the day UP. If not, you’re doing something wrong.
A trading channel is great for swing traders to get in trend candles and pullbacks and hold through swings.
How to Trade The Micro Pullback After A Trend Candle
When you find a trending chart and then you find a Trend Candle in the same direction you can either take entry at the close of the trend candle or you can get a better price by using micro pullback method. e.g the GBP/AUD shows a trend and a trend candle. Drop to the H1 and you find a beautiful pullback pattern.
