Understanding Foreign Exchange Market Cycles

An essential part of any currency trading strategies is understanding the foreign exchange market cycles.

So what are foreign exchange market cycles?

Knowing the major market cycles is important for you and for currency trading system you should be using. As each cycle requires a different approach from your currency trading system. There are three major market cycles and the ability to adapt to each cycles is an important part of your trading strategy and will improve your profitability. So you need to understand how to determine the currency market cycles if you want to become a successful Forex trader.

The three major currency market cycles are:

1) Trending

2) Consolidation

3) Breakout

A common saying amongst currency traders is "The Trend is your friend."

Trending Cycle

Trending is when the market price moves in the same direction consistently in one direction either up or down. How a currency market trend is inherently defined? A trend can be defined as progressively higher lows and higher highs. Of course if the price movement consisted of a straight line either up or down, then identifying a trend would obviously be very easy. In real life, currency prices move do not move in one direction consistently.

Consolidation Cycle

A Consolidation cycle also known as Non Trending or Ranging market, which looks like a sideways / horizontal line of bars on a chart. Consolidating is when the market is struck between two horizontal support and resistance levels and cannot break these support / resistance levels for at least seven bars.

You can use moving averages or other technical indicators to determine whether the market is consolidation or trending. In case of a consolidating market, the moving average line will almost be horizontal.

Breakout Cycle

Now what is breaking out of a Consolidation? After the market has been consolidation for at least 7 bars and then the price sharply breaks out of this ranging market sharply to make a new high or low.

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