Market Cycle Definition: Day Trading Terminology
A market cycle is any process related to securities that is perceived to operate on a somewhat predictable and repetitive pattern. A market cycle could be related to a specific industrial sector, a subset of stocks or an interrelationship between commodities, among many other possible examples.
The most well-known and accepted market cycle is the business cycle, which suggests that modern economies go through natural and inevitable successive phases of expansion and contraction.
A Market Cycle in the Eye of the Beholder
The most important aspect of market cycles is that they are not clearly-defined and universally recognized. What may be a clear pattern to one person, may be nothing more than random noise or coincidence to another. Market cycles exist on a spectrum of acceptance and believability, from the general business cycle, which has extensive support from economic theory, to the thousands of ideas and theories that support individual trading strategies.
Day Trading with Market Cycles
Many of the general economic and business forecasts that underpin the prices of securities are based on a belief in specific market cycles. While day traders may not trade stocks based on long-term information, most do employ some forecasts of general economic and business trends to identify possible trades.
Even day traders who do not believe in the existence of one or more market cycles can still use the belief of other investors in these cycles to profit from trades based on what other investors will do.
The concept of a market cycle is central to many of the theories and forecasts that aim to explain and predict market behavior. However, one person’s market cycle is another person’s string of unconnected events.
Regardless of one’s belief in the veracity of one or more proposed market cycles, their use in investing is extensive, and the awareness of this belief can be used to profit from trades based on the actions of those who believe in one or more market cycles.