Predicting the market is extremely difficult. Nobody said that trading is easy after all that’s why we constantly search and formulate new strategies to stay ahead of the competition. But most traders seem to forget the importance of a little bit of fundamentals in order to truly understand the market’s movements. In this article, we’ll show you the stages, importance and effects of business cycles to financial markets.
Business cycles are divided into various stages (Peak, Contraction and Trough) wherein, depending on your trading style and the market you’re trading in can give you several large-profit trading opportunities. This of course is only possible if you know how the market flows. Just like what the founder of The Day Trading Academy teaches -Understand how the market moves and why it moves that way.
Peaks – This cycle is a period wherein the stock market crashes, low consumer sentiment caused by financial scares happen and/or major firms experiences a state of bankruptcy. While periods like this spells bad news to various financial institutions, peaks drive capital into precious metals and energy sectors. Those who trade in these sectors are naturally the ones who can profit the most.
Contraction – Simply put, this cycle is a period of recession. Recession occurs after the peak cycle and before the trough cycle. Investors tend to transfer into industries that have lower beta coefficients and dividend components or in short -consumer non-cyclical industries. That goes without saying; you should trade non-cyclical stocks as well.
Trough – Naturally, after the recession period, the trough cycle or recovery comes next. During this period, a price increase in stocks is expected although the increase is slow most of the time. The normal course of action during this period is to trade stocks that belong to cyclical. Although this course of action is riskier than other options, it’s still better when compared to stocks that belong to sectors such as pharmaceuticals and technology-based.
Business cycles are inevitable and since we’re in a fast-paced industry, the only thing we can do is to adapt, find ways to minimize our losses and spot various trading opportunities.