What is a market cycle? How do you know when a market is going to turn around? Are we able to guess with a high degree of accuracy that a given market will turn? I believe that nobody has the ability to predict the market. Certainly some are able to identify potential turning points but at the end of the day, the market is going to do what it wants, when it wants. We are unable to know with complete certainty that a given market will turn – and even if we knew the outcome of economic data releases, we still wouldn’t be able to use this information with consistency, as there are so many parameters and active participants in all markets, all with varying opinions, expectations and goals, and essentially, positions.
The good news is that we don’t have to know what will happen in order to make money. All we do need is an edge, and this is how the casinos have been winning for years. Know your edge, apply it over and over again and you’re all set.
The Pipnotic software clearly shows you where to buy and where to sell – and in fact, it’s so clear that a child could use it. Does that mean that it will always be right? Sorry to burst your bubble but no. It will not always be right, but it will be right enough of the time to be considered an edge. Supply and demand is one thing but what about timing?
The market cycle and timing
Pipnotic software will tell you when to trade but ones analysis will show us when to trade. This is all about the market cycle. The market is low, so low in fact that the smart money will begin accumulating positions and commit capital to the given asset, as the advertised price is so low. The market starts to move higher and then others say to themselves – Hey, the market is moving higher, perhaps I should buy! Economic fundamentals improve and the media begins to report good news regarding the asset, which attracts additional buyers.
What is going on at this stage?
- Expectations rise
- People feel confident about investing in the asset
- Prices increase as a result
- People free up cash in order to buy
- Invested participants are willing to buy more
The market continues to move a little higher before reaching a price level that is high. Such high prices for an asset are unsustainable and often invite contrary traders to sell and buyers to exit their positions at a very advantageous price. This happens and the price of the asset begins to move lower. This is no time to buy, as doing so is high risk and low probability – but at the same time, those who missed out on the initial move higher begin to feel upset because they missed out and start buying.
Who is selling?
Those who bought at the low price are selling to them, they are taking profits and beginning to commit to short positions, as higher prices are both unsustainable and improbable.
As price continue to rise, risk increases and probabilities decrease.
What happens after price reaches unsustainable highs?
- The fundamentals begin to turn negative
- Economic data begin to deteriorate
- The media begins reporting bad news regarding the asset
- Price begin falling
- Expectations decline
- Buyers feel negative about their investment and begin to liquidate
When price hits the lows, most people see this as an opportunity to become negative and refrain from buying while others will take advantage of the situation and begin to buy at very low prices. The market is low, the news is bad, prices are discounted – and as a result, few wish to invest in a falling market under such conditions.
Be fearful when others are greedy and greedy when others are fearful.Oak Tree Capital
The point I am trying to make in this article is that we should treat the markets like any other market where things are bought and sold. Would you wait to buy a commodity when prices are high? No. When a market is high buy with caution and trade defensively – and when a market is low, sell with caution and trade defensively. But, when the markets are high, sell – and when are low, buy.