The market in cycles

Did you hear this term before? “Marketcycles“, can’t figure it out? “downtrend, uptrend, accumulation” and similar weird words?

Understanding the market and its cycles is essential if you want to be permanently successful with trading stocks or cryptocurrencies. Following, I will explain what you need to know in order to basically predict the future. Because that’s what you do if you apply this knowledge correctly.

We basically know four different cycles:

  • Accumulation
  • Uptrend (also bullrun)
  • Distribution
  • Downtrend  (also bearmarket)
Marketcycles Simplified Illustrated
Simplified Representation. The reality is somewhat distorted.

In my opinion, we are currently in the Accumulation Phase. Which means, in the not too distant future we’ll probably get a bullrun. You can follow the market live to see whether I make a correct forecast or ridicule myself. But let’s have a look at the phases one by one:

Accumulation – shopping

The accumulation phase happens after a bear market. When the prices went down like mad. Everything on discount and investors can hardly decide what to buy in. You can tell because the price is barely moving. The volatility of the price (how strong it fluctuates) goes to zero.

While we were in an uptrend or downtrend, therewere daily movements of 1,000 or 2,000 USD. Now, Bitcoin doesn’t move that much in months.

This phase also indicates that the interest in the market itself is extremely low. Nobody gives a damn at that stage. Confidence in the market is gone after the last crash. You could compare this to the financial crisis 2008. Everything went downhill. The clever investor took advantage of these favorable prices and purchased fundamentally good projects/stocks.

The general sentiment in the market is still baerish though. How this works exactly, keep reading.

If you want to make money, you have to buy at this stage! After all, what follows after the accumulation phase is the fun:

Uptrend – the bulls are back in town!

At this point, the market has somewhat stabilised. The price stays, more or less, constantly in the same range. Or we can already see a slight rise. This will initiate the “uptrend” or “bullrun“.

The early birds are becoming more and more interested, as stability conveys some certainty. Media outlets beginning to report that the worst might be over.

That will lure the normies back into business. The sentiment in the market begins to change and the investors fall back into “FOMO” which means: “fear of missing out”.

Maybe you’re guilty of this? Don’t worry, me too.

Happens every time

FOMO: There is no better way of describing the market at this point in time. The market is climbing and people are afraid they might miss big profits if they don’t jump in now. Therefore, some buy almost blindly. Coins which have already recorded enormous price increases continue to rise steadily.

The uptrend sets in, we are in a so-called bullrun. The entire market is gaining enormous in prices and value.

BTC Chart 3100 USD profit per day
3,100 USD Green candle in just one day.

That’s the bitcoin chart at the end of 2017. It shows the market movement per day. Which means one candle shows the price movement in a day. The candle by the green arrow shows that the price of Bitcoin rose from 13,500 USD to 16,600 USD. 3,100 USD increase within 24 hours. FOMO was over 9000. Everyone wanted to have some Bitcoin at this time and not miss another run.

This is also the time where you and I will earn money in the future, but we have to be careful when the next phase dawns:

Distribution – remembering Damocles

After an enormous bullrun, the sentiment within the market changes from euphoric to uncertain. A few people starting to doubt: “it can’t always just go upwards?!” or “at some point the bubble has to burst?”

It is incredibly difficult to guess this phase correctly. Some people are still very euphoric and even the price sometimes gives the feeling that the market will surge again and it was just a fake. This phase is very emotional and “emotional numbers” have an effect.

For Bitcoin this was pretty much exactly the 20,000 USD mark. Right after bitcoin touched the 20,000 USD line, the market turned around:

Bitcoin almost 20000 USD worth
Emotional 20,000 USD mark.

This price represents an emotional barrier because it is an even number. This kind of thing just acts like a barrier in the human brain.

You have to be aware that these prices and candles on the charts only reflect what kind of bids people made. These are not magical trends, it is still driven by people’s choices and emotions. In this example people were thinking:

I’m gonna sell my BTC right before 20k, nobody is gonna pay more than that.

Numbers like 10,000, 20,000 or 50,000 represent emotional barriers. On the other hand, it works exactly the same the other way round when we are talking about “support” in downtrends.

Certain uncertainty

If you look at the picture above, you will see that the change of sentiment isn’t one obvious candle. It’s pretty torn. Right after the 20,000 USD mark, it went considerably downhill, but in between, there are still very clear green candles. It’s not a straight line down.

This can make the inexperienced investor pretty unsettling and give the impression that it was only a short uncertainty and now we’re going uphill again.

Recognizing this phase is incredibly difficult and therefore it is usually done like this: One shall sell half of his investment and recoups the profits while leaving the other half in, if it shoots to the moon.

If you are very unsure, you can, of course, sell 75% or more. Your choice.

Downtrend – Beware of bears

The inevitable result of the distribution phase is the bear market or “downtrend.” The mixed perception of the distribution phase has now changed into a negative feeling.

“It is absolutely overrated.” or “Far too expensive, there is no value in it.” are the thoughts you hear now. People are unsure and sell their shares/coins before they lose even more money.

But there’s a problem: No one buys at these prices, so you have to lower the price for your coin to meet buyers. The price overall goes down. Now, more people become unsure and sell again under market value to find buyers. This creates a vicious cycle.

Downtrend is a bitcoin January February
Two months downtrend for Bitcoin at the beginning of 2018.

As you can see in the picture, the downtrend doesn’t happen in a straight line. There are always little glimmers of hope in between. Over a longer period of time, however, it can be clearly seen that the price is steadily declining.

Dominated by bears

The bears now prevail over the market. The mood is bad, even good news for individual projects do not change the market sentiment. Bad news, on the other hand, push the price even further down (the uptrend is exactly the opposite, good news boost the price, negative ones have little effect).

During the bear market, i.e. after a violent crash, one is well advised to buy as much as possible. Sounds counterintuitive, but it’s the key. You are trading against people’s intuition. Even if the price drops further, these prices will probably never come back. So go buy the blood.

The downtrend has similarities to the uptrend in so far, as there are emotional barriers as well. Barriers that are called “support”. Basically buying support at a key level. Again, emotional figures such as 5,000 USD or 6,000 USD are considered barriers. 6,000 USD, for example, was an emotional barrier after which it broke, a lot of people called for the end of Bitcoin or gave up.

People think that the price won’t fall lower than 6,000 USD, or that this price is a reasonable start and did set appropriate bids on the markets. This created a price barrier.

Shooting quick

But you have to be careful, some projects can actually die completely. Nobody is really safe. So you should be looking for projects that have good fundamentals, a real-world benefit and for which a viable future can be estimated.

Or you can check my portfolio updates in which I talk about proper projects to invest in.

The sentiment of the bear market

The general survival of individual projects or the whole market is questioned. Especially towards the end of the bear market. When the mood has arrived at this low point, it tells slowly, but surely, that the transition into the accumulation phase has begun again and the circle closes.

The circle closes and the next step is the moon again.

In most cases, you can assume that any uptrend or bullrun will break old records. Not always, but most of the time, or on a longer timeframe. Since the old emotional barriers have been tested, they are now fragile. But nothing is guaranteed in this market.

Cheat sheet

These behaviors aren’t new to crypto. It has been around for a long time in other markets such as equities or stocks. That’s why the wall street created a cheat sheet:

Wall Street Cheat Sheet

It should become obvious that the markets don’t move in smooth up’s and downs. The reality is somewhat distorted.

Time will tell…

You now know the four phases which are inherited by most investment markets. It’s impossible to determine how long or short a certain phase might last. The latest distribution phase for bitcoin took about three weeks before it went downhill.

The current bear market has already been around for 12 months. When it’s going to be over is hard to say. In my opinion, however, this should not take much longer, but again, nobody knows for sure 😉

Cheers,
Alex


A little anecdote

The name of the bulls and bears originates from the stock market and stems from the way the two animals attack. The bull thrusts his horns from the bottom upwards (uptrend) and the bear beats his paws from top to bottom (downtrend).

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