Global financial market of currencies (Foreign Exchange Market) enables a simple trade of foreign currencies. It represents one of the greatest and most liquid financial markets where the main role is conducted by banks, central banks, financial institutions, governments, corporations, insurance companies, but also individual investors. Forex is available for 24 gours per day, except for weekends. It is specific due to huge amount of transactions, great liquidity of market, global spreading, great number of different factors that affect the changes of currency pairs and the possibility to use Leverage. On this sort of market, profit is gained by buying and selling of currencies.
Foreign exchange market is hard to compare to other areas of world financial markets, mostly because of susceptibility to many factors. The prices on the foreign exchange market are changing constantly. Changes of currencies are usually provoked by real currency values. The value changes due to offer and demand, but likewise to news, presumptions, political changes, expectations, and also weather changes. If a natural disaster strikes, economy of that area suffers, and that is a factor that affects currency.
Since the Forex is decentralized, the influence of the Central Banks is trying to be avoided. The main trading center is considered to be London, but New York, Tokyo, Hong Kong and Singapore also represent very important centers. By having these centers spread worldwide, it is possible to trade all day long, as it is always daytime somewhere. The transactions begin in eastern countries on a given date, and it finishes in western. So, by Friday evening in New York, the Forex takes a pause, and on Monday morning in Tokyo, it begins again.
The trading on the Forex must have huge amount of units bought-sold, as the changes upon which the profit is made is small. A measure that consists of 100,000 units is called “LOT”. So you can measure your trade by lots.
On the stock market, the profit is made when a stock is bought for low price and then being sold for higher price. In order to make profit, the change of the stock value must change. People who follow the flow of the prices are called brokers. Investor use brokers to deal with their money in order to gain profit.
Everything that can be measured by time usually exists in cycles. Even air that goes through photosynthesis, water changes its state of matter, earth goes round its axes, and it rotates around the sun. Even the weather comes and goes in a cycle – which is in connection of water changing its state of matter. Since everything goes in cycles, with modern day instruments, it is possible to predict some future occurrences.
Based on events that we mark down that occurred in a cycle, for example, at the end of June summer begins on the northern hemisphere. Based on observation, we know that when June arrives, hot and warm days are ahead. Likewise, we can form a hypothesis of future events to take place based on what we know so far.
Market functions in the same pattern so we can evaluate market movements in certain stages and thus predict where it could go. Based on those information and predictions, we can calculate and build the strategy of our business.
To understand how market cycle can be determined, we first must realize basics about the market cycle.
Think of a line that represents a time of price rising and decreasing and that makes a wave in a chart. The bottom point of the line is the low price, and the top point of the line is the high price. Now picture the line going up and down to the point value of the price. Now, the line of the time from low to low or high to high point represents a cycle. Meaning, the time from the low point of the price over the time where the price was up, and again until the point of the price where it is low. Compare these points to the shortest day of the winter of one year to the shortest day of winter of another year. Just what a cycle would mean. Often repetition of similar cycles over a period of time is the basis for determent of a trend, what is the base for determent of prediction. And we determine our investments upon those trends.
Market cycles are viewed based on the length of a cycle, so we have short term cycles, medium and long. Medium tern cycles and long term cycles are being used for long term FOREX analysis. Medium term cycle is about 30 days and long term is 10-12 months. Short-term FOREX analysis considers a week’s time for their analysis.
In order to determine the length of market cycle, we must know the time from one point of the chart we imagined earlier, to another. In a currency market it is not always the case for the cycles to be the same, but the time between the points is similar, so we must use what we have to approximately determine the term. Therefore, average distance is being considered to describe the length of a market cycle.
How to determine market cycle using technical analysis for short term trading
In forex trading, traders use Elliott wave principle and Fibonacci levels.
Using 4H chart timeframe traders can draw forex market cycle.
For example, I watch everyday Elliott Waves technical analysis from Jamie Saettele, CMT, Sr. Technical Strategist where I can see possible market cycles scenarios.
Please watch video above and learn more about market cycle and Elliott Waves