What is a Forex Market Cycle ?

Market cycle is a term that refers to forex market trends that repeat after a certain time period. The market cycles draw data from past events and help in predicting future trends. Understanding of forex market cycles helps traders forecast highs and lows precisely and devise their investment strategy accordingly.

Understanding the Forex Market Cycle

Let us first try to understand the basic principle of forex market cycles. Consider a situation where prices fall and rise after a specific period of time. In the graphical demonstration, this trend will create a wave-like structure. Every price rise will form a high point, called the crest, and every price fall will create a low point, called the trough. Simply put, a combined crest and trough will form a wave cycle.

However, a forex wave is not so simple to deconstruct, since several factors govern it. In terms of the forex market, whenever the wave repeats itself, it is called a cycle. Consider the example of the EUR/USD pair for a period of one year. The price value for the pair rises for a period of three months (January to March). So, the forex wave will show a rise during this period. Then, for the next three months (April to June), the value of this currency pair dips gradually, making a fall in the graph. Now, suppose from July, the prices start to surge again. This will give an impression that the market cycle for this currency pair is approximately 90 days. With this knowledge, the traders can change their strategy according to the expected period of the cycle.

Types of Forex Market Cycle

Forex market cycles emerge in three different forms:

Short-term cycles

These are based on daily fluctuations in the price value. They are good for individuals engaged in daily trading.

Medium-term cycles

These may last from a few days to several weeks. They are the primary source of forecasting for swing traders.

Long-term cycles

It can take inputs from some weeks to years to define the long-term cyclic trend.

Forex market cycles are often complicated and require an expert to draw interpretations based on them. However, basic knowledge about the cyclic behavior of a currency pair can also help you significantly in forecasting trends.