All assets go through boom and bust cycles. Boom and Bust cycles tend to be made up of 5 distinct and recognizable components.
Boom and Bust cycles are applicable to real estate, commodities, financial markets, cryptocurrency or any other asset class.
Don’t let the terms Boom and Bust scare you because the fact they follow cycles means that they can be predicted and therefore we can use these natural market cycles to our advantage.
Most people will know by now that boom and bust cycles have happened with crypto currency and are likely to happen again.
The reason why people don’t usually associate boom and bust cycles with real estate or other assets is because the cycle times are far greater and your average person has a short memory, little knowledge of history and a lack of discipline and purpose.
The reality is that boom and bust cycles do play out with real estate but it just takes much longer and therefore its not something average people think about until its too late.
The typical mindset before the bust is “property will always go up”. A smarter mindset to cultivate would be “Hubris comes before the fall”.
A recent example of a property market going bust is the Australian property market which is currently experiencing large valuation draw-downs across the eastern Australian cities (Sydney, Melbourne) and other parts of Australia at the time of this writing.
Despite the news propaganda downplaying the severity of this crash it is likely to continue for much longer. The bottom will be in when the general public no longer want to invest in property – However, this will become the best time to buy; when you’re average person ‘taps out’.
With this knowledge let’s look at the 5 Market Cycle Phases and how we can play them properly to make money:
Phase 1 (Accumulation) – The best time to load up on an asset.
What does it look like?
The price range is flat and sits between a horizontal range, order volume (buying) is low.
What does it feel like?
This stage feels boring, the lack of price volatility makes buying during this time boring since the market is not moving up or down very much relative to what it does in it’s bull or bear cycle.
This means it’s somewhat stagnant (the calm before the storm). To buy and hold (Accumulate) during this phase you need a lot of patience.
What is the best action to take?
Buy larger amounts of the asset to Accumulate a base position for the next bull cycle.
What makes it hard to take this action?
Actually buying during this phase is EXTREMELY DIFFICULT. Why is it so difficult? because the accumulation phase comes after the long painful and slow sell-off phase (Phase 5 – the slow grind) and usually (but not always) after a capitulation event.
A capitulation is where a large amount of market participants finally give up and sell their holdings in a large and rapid final sell-off event i.e. they ‘tap out’. They “can’t take it any longer” and give in.
The reason why it is so hard to purchase large amounts of an asset after this is because people tend to have a trained/biased psychology which has put them in a cognitive routine of expecting consistent momentum towards lower prices and this puts a large amount FEAR into their psyche.
The general ‘herd mentality’ will be full of fear and therefore it is hard to be bold and go against the herd at the ‘peak’ end of this fear phase.
Phase 2 (The Early Bull Trend) – The best time to take ‘Break Out’ trades
What does it look like?
Price starts to break above the flat accumulation zone with a buying volume increase. Typically price will go higher than most market participants anticipate and then it will usually retrace to test prior resistance (top of the accumulation range) as support.
What does it feel like?
Since most people by this point have a bearish bias the general feeling is ‘disbelief’. Participants think this will be a ‘suckers’ rally and that price will come back down to the lows or new lows. There is a general skepticism towards price starting a new bull trend.
What is the best action to take?
By this point hopefully you have completed most or all of your ‘accumulation play’ which means you are happy to see price break out. You would be watching for common bullish technical analysis patterns that will indicate price may break to the upside i.e. A Bullish Ascending Triangle, Adam and Eve Double Bottom or an Inverse Head And Shoulders.
If you have dedicated some capital towards trading these early ‘break outs’ you would be looking to take break out trades from these technical patterns in order to add profit to your longer term base accumulation position.
If you didn’t manage to accumulate during the accumulation phase now is still a good time to buy a base position in order to sell it during the next market phase ‘the parabolic run’. While your cost average will be higher and not optimal like it would have been during accumulation its still a relatively good time to buy because the probability is that you can sell at much higher prices during market peaks.
What makes it hard to take this action?
As described in in the feel question market participants are in a state of ‘disbelief’ a cognitive bias has formed which expects bearish price action and failed breakouts. Again doing the opposite of the herd mentality is hard – being bold while others are scared is not easy however if you understand Technical Analysis you should have enough conviction to back your predictions if you see the right kinds of price patterns play out.
Phase 3 (The Parabolic Run) – The best time to Take Profit
What does it look like?
This is when the market really takes off, typically you might see new all time highs, there is a bullish fever and everyone believes price will go up and up and up (which it does until it doesn’t). The lines on the price chart start to go vertical, the angles of the trend lines get more and more acute and the amount of time it takes for price to go to higher levels gets shorter and shorter. The price action makes a ‘parabola’ shape which is a U-shape that looks like the cross section of a deep bowl.
What does it feel like?
This is where the herd hysteria kicks in. You might see and hear people saying things like ‘this time its different’, ‘this is a new paradigm’, ‘things can go way way higher’. There is a consensus that prices will continue to rise and rise – the market becomes irrational. Market participants will find every and any reason to justify why prices will continue to go up indefinitely.
What is the best action to take?
SELL. You don’t want to sell your whole position at the beginning of the parabolic run however you want to take profit along the way. But why take profit along the way in sections and why not just take all of your profit at the top? The reason is nobody knows where the top will be – NOBODY. The best trading and investing expert in the world doesn’t know. Everyone will be making a prediction and of course some people will predict correctly however this is because of luck. Even a broken clock is right twice a day.
We need an action that will guarantee us to win irrespective of where the eventual top is and the best way to do that is to take profits in sections (10% here, 20% here and so on) consistently throughout the parabolic advance (skyrocketing price).
Professional investors call this ‘scaling out’ they will take a portion of their position and sell it i.e. 20% and leave the remaining 80% on the table, when price gets to another high (potential top) they will sell another 20% and so on.
What makes it hard to take this action?
During the fever pitch of a parabolic run if you go against the herd mentality and actually take profit other market participants will want to make fun of you. The market is going up ‘forever’ and only an idiot would take profit now. This is the dangerous type of thinking that got people wrecked during the 2017/2018 Bitcoin bubble.
The news was interviewing celebrities who added fuel to the fire while they promoted cryptocurrency projects, products or services. There was a message of ‘everyone is getting rich except you’. Taking profit and then staying out until there is a crash is very hard when everyone is sure the market will just keep going higher and higher but selling is the right thing to do. Buy low, sell high – keep it simple.
Phase 4 (Volatility/Fast Crash) – The best time for Bounce Plays or Short Entries
What does it look like?
During the bull trend there will be price corrections that usually fall between a percentage range, these corrections are healthy. The Fast Crash comes after the parabolic advance and price corrects with a greater percentage than normal (this is an anomaly) signaling the start of the Bear Market. During the abnormally large correction there is increased volatility and a large bounce which can be played using a ‘bounce play’ buy the dip scenario.
What does it feel like?
Given the parabolic move was made up of euphoria and irrational thinking the fast crash is a contrast of extreme fear and hope that the bull trend will resume. The bounce play which ends in the first “lower high’ of the bear trend is a classic ‘Bull Trap’. This is where ‘Dumb Money’ or inexperienced market participants think/hope the bull trend is still in play but they quickly find out there will not be another higher high and usually get burnt while selling during extreme fear.
What is the best action to take?
If you haven’t exited the market yet you want to look at taking your exit at the top of the bounce (usually about the 0.618 Fib Retrace Zone – Measured from the market top to the bounce bottom since the market cycle has now reversed from bull to bear). If you bought the bounce play and your position is in profit you would exit your position here.
What makes it hard to take this action?
Many people are still convinced that the bull market is still in play this is because the long uptrend and parabolic move has given them a bullish cognitive bias. When the bull market is finally over a lot of people have trouble switching gears and shifting to a bear market mentality quick enough.
Phase 5 (The Slow Grind Down) – The best time to do nothing & stay out of the market
What does it look like?
A long slow bleed of consistent selling (red candle sticks) that goes on and on which tests the patience of the market. Usually this long and slow bleed downwards ends in a capitulation event where people ‘cant take it any longer’ and sell in large volume. This capitulation frequently becomes the end of the bear market and the accumulation phase starts again.
What does it feel like?
Market participants that didn’t sell and stay out of the market are usually in pain because they are experiencing large draw downs. Even traders are having difficulty since short plays don’t work as well with the low volatility and they tend to get ‘chopped up’ in a death by 1000 cuts scenario where they end up paying too much in fee’s and stop losses with little or no opportunity for profit taking.
What is the best action to take?
Stay out of the market. Wait for the final capitulation or a change in market structure and sit in cash. When the market capitulates or starts chopping sideways after a 85% correction or long period of blood start considering when and where you can play the next accumulation play.
What makes it hard to take this action?
Patience is a virtue and staying out of the market for long periods of time while it sells off is very difficult. This is the best time to get a hobby or balance your life with other activities while the market sorts is self out before its a good idea to become an active participant again.
Remember these and remember what actions to take for each one and you’ll be able to consistently make money investing. If you are not actively investing yet then you should consider starting with Cryptocurrency.
If you have no money to invest you need to make some.
If you have no time to invest you need to take some.
Until next time..
Jason Wahlberg
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