The phases of a market cycle
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 5 min
In short
Market cycle theory is a widely used framework in which markets repeat phases of accumulation, advance, distribution and decline. It is convenient for describing the past, but there is no established method for identifying which phase you are currently in.
Key points
- A framework of accumulation, advance, distribution and decline
- Phases can be marked out in hindsight
- No established way to identify the current phase
- Neither length nor sequence is fixed
Definition
A descriptive framework in which markets pass through recurring phases, commonly divided into accumulation, advance, distribution and decline. No official definition or boundary exists for these divisions.
The common four-phase version runs from accumulation, where trading continues amid little interest, through an advance in price and participation, into distribution as the rise stalls and flows conflict, and finally decline as prices fall and attention drains away. The framework was borrowed from long-standing equity market analysis.
It earns its keep when describing the past. Grouping price and volume changes into phases makes it far easier to narrate what happened. As a tool for describing history it is perfectly coherent.
Identifying phases in real time is another matter. What looks like distribution can turn out to be a pause, and boundaries are only fixed in hindsight. Phase lengths and even their order vary, and the framework failing to play out as expected is the normal case. Acting on 'we are in accumulation' treats an unsettled judgement as a settled fact.
Watch out for
- · Phase labels are applied in hindsight; real-time identification is not established
- · Two analysts will divide the same chart differently
- · Timing trades from an assumed phase has no verified support