Using Stock Market Cycles Profitable Investing by Adam Khoo

hello and welcome to this video tutorial on market cycles I'm Adam Koo once again and in this video you're going to learn about the different phases the market goes true and it's important to understand a different strategy step to perform well under different market conditions and basically there are four cycles the market goes through four cycles right the first cycle would be the uptrend cycle this is when demand exceeds supply and more and more retailers are piling in pushing the share price up the market is bullish it's up some of the mystic and you find that price tends to make higher highs and higher lows and for most of the people you'll find that is the easiest time to make money because almost every stock you buy will tend to go up now up trends don't last forever eventually up trends would start to top and it will then go into a consolidation distribution phase okay where the market moves sideways direction direction list and we call it a distribution phase because that's when big institutions start to sell shares of stock but it don't do it fast enough that it cause a panic they do it slowly right and they are selling more than they buy and who's buying at this face unfortunately the the retail investors you know the delay legis to the market start to buy this face and once most of the chef's been disputed okay and the retail investors realize that no one else is buying this up to parents to sell and that's when a market goes into a downtrend phase when a market is pessimistic it is bearish and prices being lower highs and lower lows now eventually the downtrend will bottom and in only bottoms once the last retailer sells in panic okay and after the downtrend ends you have got another consolidation phase where the market moves sideways except it's a accumulation consolation phase and a difference is at this point of time big institutions are beginning to accumulate share slowly a day again they don't accumulate fast enough that the price up but they accumulate slowly so that the retail investors can see and once they've bought enough they start to you know buy more aggressively to push the share price up and eventually the market will break up into a new Uptrend and slowly as the uptrend begins to unfold and goes higher and higher and more retailing that's a central part in and again the uptrend will then form into another consolidation distribution and a downtrend and the cycle continues now most of the time the cycles go in this sequence uptrend consolidation distribution downtrend and consolidation accumulation but not always the case it's not a perfect science sometimes can go from uptrend and reverse immediately to a downtrend or it could going up and on to an uptrend you could go through through a consolidation that looks like a distribution and then exceed next thing you know it breaks up into a new Uptrend so everything is possible but more or less it follows the sequence so let's take a look at the different phases a closer and you know how strategies tend to flourish under each phase so again the first phase is the uptrend phase or call it the boom market and this is very obvious because during this time demand exceeds supply and so the market is optimistic the market is bullish whether it's good news or bad news the market still goes up and normally during the uptrend phase you find that the moving averages tend to be sloping up in a particular sequence are very often the 50 moving average imagine this a 50 moving average will be above the 150 moving average and you'll be above the 200 moving average as well that's a very clear uptrend okay and an uptrend is defined specifically as price making higher highs higher high points and higher low points as you can see so once again when the markets on an uptrend you find that is very easy to make profits any monkey can make money you try that 7 of 10 stocks load dois so a long trades and trend following trades then do really well in an uptrend market cycle now specifically when's the best time to enter on an uptrend now during an uptrend you realize that prices don't go up in a straight line they tend to go to you know certain patterns as they move higher and the first pattern that it goes through it's a very regular pattern and it's what called a wave pattern something like that goes up down and up and down in this sequence ok and during this time it tends to bounce off one of the key moving averages like bouncing off the 50 moving average 100 or 200 average or bouncing off a very clear trending support line so whenever you see the price is bouncing of the moving average in a very predictable way when you end up simply you buy over here when the market bounces of the moving average that's when you take a that's when you take a long position a long trade when it bounces off the moving average okay somewhere around here and around here okay so that's the first pattern that tends to come up doing an uptrend the second color pattern that comes up is when the price as it goes on an uptrend right it goes up and what it does is it starts to make lower highs in this case lower highs you can see lower highs in a kind of short term counter trend move but the overall trend is still up because the price as you can see the 50s above the 150 moving average and the price about the 200 moving average so the overall medium-term trend is up as you can see on trend but at the short-term is making a shot encounter trend move down kind of like a spring that it's Prince coiling and usually it breaks out of that that pattern as it breaks up that counter trend line so when you see a pattern like this then what you can do is to enter when the price breaks out of that counter trend line which usually forms cut like a witch pattern so you buy basically on this break up okay so that's another form of entry on an uptrend during an uptrend that price can also make very small sideways consolidation patterns now this is not be confused with the big consolidation distribution or consolidation accumulations are small consolidations along the uptrend so what happens is the price goes up on the uptrend okay and then makes a small consolidation along the way where is defined as making same high same high same high and same high and you should be tested at least three times to be a confirmed resistance so when you see this pattern what you want to do is to buy only when it breaks out when you see the candle breaking out of this resistance that's when you can and the long tray so you buy on the breaker over there okay here's another example where the price is on an uptrend test one in fact let's test one here has to has tree breaks out and you can buy over there okay so you can buy on the break out of the resistance or you can buy the pullback to the resistance of one line so what happens is sometimes after the price breaks out okay this is called a breakout because it breaks out of this resistance level as you can see okay so you could buy on the breakout breakout or after it breaks out you wait for it to pull back to test this support because after a breakup of resistance the resistance becomes support that support resistance 101 or I do review that video if you're not sure and when it pulls back and is able to hold that support and bounces back up then you could also enter over here this is called buying on the pullback so you can either buy on the breakout or bottom and pull back again pull back don't always happen so it's up to you which entry point you're looking for now when that's an uptrend M okay an uptrend phase usually ends when the price makes the final parabolic search so what is parabolic parabolic means going up almost 90 degrees when the market is euphoric and they think that the price will go up forever and that's where the lid retailers come in and push it up to unrealistic and unsustainable hinds so usually on a healthy uptrend you see the price going up like that at a 45 degree angle and what happens is eventually near the end of the uptrend you find the price will start to go up at a 90 degree angle when it's parabolic okay so once you see the price starting go at a 90 degree angle you can be sure that the uptrend is coming to an end okay when it's highly overbought and usually at this point the price goes up so fast that it is very far from the moving averages right it in fact pulls away from the 20 moving average and not to say the 50 moving average would be a lot further behind so that's why you know it's going to kind of like pop up all right and once it makes that high over there you find that secretly it can't make higher heights it makes a lower high over here so once it coming a higher high mix a lower high or mix the same high you know that the market has talked and it's going to go into a consolidation distribution phase or it's going to plunge immediately into a downtrend so those you those of you who are more experienced traders and I especially go to well the commit professional and all those things you know that when you see a parabolic move to the top and you get a very powerful reversal pattern to the candlestick patterns you can begin to do a counter trend short sell trade to shot the stock and make money as it collapses over here again this should only be done if you're more experienced in trading and not if you're beginner okay so that's when we can do a parabolic shot over here so that ends the bull market that ends the uptrend cycle now let's go into the next cycle okay now we come to the second phase the consolidation distribution phase so this phase begins after the end of an uptrend and like I mentioned earlier this is when institutions are slowly reducing and distributing shares of stock okay and again they're not doing it in a fast way that a market can pick it up and it creates that downward pressure where supply exceeds demand so they are selling slowly but are getting rid of their shares okay so during this period is quite obvious because the market doesn't make higher highs anymore in fact you can find you see this is a high over that makes a lower high a higher high higher high and then lower high and so more or less is cup-like going sideways right and the moving averages tend to start flattening from sloping a bit and flatten and again it's one big giant consolidation over here where you have a big resistance and a support over here so you find that in during this phase trend following no longer becomes profitable that's when you know you buy and you're hoping it goes up you make money get very frustrated because once you buy doesn't go up very far comes back down again you hit your stop-loss you find that when you when it stops breakout of consolidation you bound a break on a breakout fails so you start to see a lot of these things happening breakouts failing trend-following doesn't go very fine comes back down again you can bet you're in this cycle alright so for trend followers in the may SEMA get really frustrated during this cycle you see it doesn't work anymore the massive change I've got news for your markets don't change human beings never change it just goes through cycles okay so you've got to be able to go through these cycles and be there once the market starts trending again but having said that during this cycle is going sideways for a couple of months or even even a year or so you can make money on certain strategies so for example in this cycle what is profitable would be trading the range strategy where you pick stocks that I had a very clearly defined range and you buy when it's near support and you sell when it's near resistance right that's called trading the range what is also profitable would be mean reversion strategies when it gets a bit too high and you shot it and gets too low and you go along and you can tell when it's overbought oversold using indicators like Bollinger Bands stochastics and things like that you can also look at divergence reversal patterns right bullish divergence price makes higher highs maybe in this case but Magdy doesn't make higher highs and you can do a short trend or short-term counter trend trade down okay or you get a bullish divergence reversal pattern where price makes low aha a lower lows make D makes higher lows and you can do a quick long counter trend up and get out okay what is also profitable would be work on non directional strategies that are normally used by options traders which is beyond scope of this course things like you know iron condors and cupboard calls and shot straddles and shot strangles and all these cute names okay but nor is if you had to trend-following it doesn't mean have to change your strategy just keep doing what you're doing and understand it in these phases you just got to go to their frustration and the market will start coming back into a trending phase again so usually in this cycle there are some repeatable patterns you see when market tops and it goes through this consolidation and one of the common patterns you see would be a double top at then the price goes up makes a high comes down makes another high and normally it would be at the same level or slightly higher ok slightly a higher high and comes all the way down so that's called a double top pattern so some traders what they do is they see this first top okay and once they see this second top exceeding the high of this and they wait for a bearish candlestick reversal pattern for example you may see a a morning star pattern or an evening star pattern a bearish pinbar pattern a 1 black crow pattern and it be confirmed by an overbought condition like stochastics are overbought the prices above the the Bollinger Bands and you could do a short sell over here can do a short to catch the trade going down again this more for experienced swing traders another common pattern is the hit and Shoulders pattern where price goes up comes down goes up to a mega higher high comes down and makes a lower high again so cut like a hit over here and to show this okay so normally what traders do is they draw a line ok somewhere here and if it breaks this neckline because this is called a line they go shot anticipating the downtrend after this big consolidation pattern over there so that ends this phase let's go on to the next phase so usually after the consolidation and distribution the market will then go into a downtrend so downtrend is also known as a bear market and can last for anywhere from 1 year to 2 to 3 years so during this phase a supply of shares exceeds demand you know everybody wants to get out they are panicking they're selling and no one is buying or I especially the institutional buyers so usually on a downtrend you find that the the market or the price is making lower highs lower hines like that and lower lows so that's the definition of a downtrend okay so obviously on a downtrend investors will get crushed ok those who are buying and holding would have to really suck it up and close their eyes and not kill themselves right because that's when a stocking collapse 20 30 50 60 % e % at times all right and 7 out of 10 times we go along gonna lose money but this is time when the short sellers making a lot of money that's when you when you short sell any stock if you take any monkey and show that dot any stock 7 out of 10 will go down so you want to be short the market that's when you make money on a downtrend so on a downtrend you find that the price is usually below the moving averages below the 50 and the 50s usually below the 150 and the 150 is usually below the 200 moving average and moving averages are all sloping down in sequence ok so again this is a time when it's really easy to make money when you're taking short trades or you're doing trend following to the downside okay and if you're going along you're going to lose money easily right so when's the best time to short the stock of the get on a downtrend well again it depends on the pattern and the various patterns and the first pattern you will see is when the price is bouncing off the moving averages so when you see this pattern like that price is bouncing bouncing in a very predictable manner right so you exist lower highs and lower lows in this very nice wave pattern and every time it rarely is it hits a moving average and bounces and comes all the way down so when you see a pattern like that it's very obvious that you definitely want to sell somewhere over there once it has bounced once it has bounced you can shot over there okay another pattern you see is that when it's coming something is coming down like that it would tend to temporarily in the short term make higher lows okay it makes higher lows so again the overall trend is down the overall medium-term trend is down the 50 is below the 150 moving average below the 2 her moving average right so it's overall downtrend but in the short-term the price is making a counter uptrend like that count the up counter uptrend making higher low so you can easily draw a counter trend line somewhere like that so when you see this pattern when you shot it obviously you don't want to shot it when it's above this counter trend line but once it breaks the counter trend line and it's going to continue down you can shot it over here somewhere over here okay so this is again a very common pattern so you shot it over there or shot it at the break down over there okay now on a downtrend again the the price can make mini consolidations where price goes down hits a support test1 test2 test3 again it has to test at least times to confirm is a strong support and it's in this small little consolidation on an overall downtrend so when you see that pattern when you short you shot when the price breaks below this support level right and you can do a short sell over that take it all the way down here's another one price going down hit support one two three four it has to test at least three times it tested four times over there and then it breaks so once it breaks you could short it here okay so we shot the breakout to the downside or if after it breaks you can wait for pullback for it to test the resistance that has now become support so once it tested it comes down then you shot it over there so you could shot it on the initial breakout or shot it on the pullback and the test okay so similar to the long is just opposite direction so down trends are fun you can make money on downtrend so how do you know when a downtrend is going to bottom okay so again a downtrend bottoms when the price makes a final parabolic plunge okay so usually on a downtrend again the price moves 45 degrees okay so it goes like that right market gives people hope kills and get some hook kills them teases them kills them kisses them kills them right so increasingly people get more frustrated because they think is going to go up they buy and they died it by any die right when it comes to a poor when people start panicking and see you know what the market will never recover I'm out and that's when the price plunges 90 degrees and we've got panic selling and that's what we call capitulation capitulation means with surrender and I always like to say that the price can only bottom where there are no more sellers left if the law says the price control over so there are no more sellers left when the last seller has sold okay when when a person who had all the faith all the way lost favor and says you know what I would throw in the towel is over I'm out and that's when the market bottoms okay and that's when you can use the capitulation strategy to buy when the last guy jumps off the building okay that's when you can buy over here for a quick counter trend trade upwards using a capitulation strategy okay so let's when the market bottoms so after a bucket bottoms are two things can happen we either rebound very strongly into a new Uptrend okay all we go through a consolidation accumulation phase where the institution slowly accumulate you know and then push it into an uptrend again so let's take a look at this last cycle okay so now we come to the consolidation accumulation phase and this begins after a downtrend and during this phase you find that institutions or the big boys are slowly amassing shares of stock so this when the institutions accumulate shares slowly right not fast enough that people start to realize it but slow enough that the price moves sideways so we also call this the basing period because the market builds a base a foundation a base before eventually breaking out again okay and usually find that in this phase negative news no longer affects the stock price in a downtrend every time there's a bit of negative news boom the price goes slow boom it goes low it comes to a point where you know the markets so used to it you know no matter what bad news comes up the price like I don't care I'm not going to anymore right and that's when you know that hey you're in this phase so when is this stage complete well this dish is complete usually when a key resistance level is broken so during this accumulation phase you find that the price can't seem to break a certain high so these are the highs over there as you can see so it forms again a resistance okay and usually of course a set in support level okay so once this main a resistance level is broken over here is broken okay it breaks here that's when it breaks out of this phase and starts a new Uptrend so you can enter the trade once it breaks out of this strong resistance level and usually at this point the price would also have just crossed the 50-day moving average most of the time right as you can see the price in fact cross the 50-day over here but it would have been risky to take it because it's still below the resistance so over here when you broke the resistance it's above 250 and you could have taken the trade start the new uptrend or you could have waited in fact for the 50 to cross the 150 to buy on the uptrend okay so usually by the time it may have gone up by quite a bit so you're going to take an earlier trade you could enter based on breakout of the resistance and above the 50-day moving average so before that happens you find that again during this phase okay a trend following is again not really profitable because the muck is going now is going sideways so what are you going long going short it can be quite frustrating because it's not hitting your profit targets but again during this period you can make some quick money true short-term swing trading which is again trading the range buying on the support selling and resistance and repeating the process right buy here sell there you know you could also trade divergence reversal patterns okay we are bullish divergence and bearish divergence you could also enter base on capitulation and exit thing once you get a two-hour before I kiss the resistance and comes back down again and again non directional strategies if you have the options you can look at again your iron condors shopping your iron condors shot in your straddles and your strangles okay so again during this consolidation accumulation phase before the uptrend there are some repeatable patterns ABC one would be the double bottom pattern okay where the price comes down makes a low and then comes down and makes a slightly lower low okay so it's a double bottom so again experience swing traders once they see that the price has made a lower load taking on this previous when you see a double bottom and if they see a powerful a reversal candlestick pattern that's bullish in nature for example they see a morning star over here you see a bullish pin bar or you could see a capitulation with a one right soldier you could take a buyout over there okay so another one would be you could have a triple bottom goes down one you know two and three boom right it could also be a triple bottom sometimes okay like so right one two and three okay could also be a triple bottom pattern so to summarize again you find that a market goes through these four cycles right the uptrend the consolidation distribution the downtrend and the consolidation accumulation phase so why is this important to understand because whatever strategy you use will not perform all the time it will perform under certain conditions and not so in other conditions for example again if you're into trend following and you're at opposite goes long and up trends you find it during this phase you'll feel like a genius because anything you touch will make money very easily and you have very high winrate eighty percent ninety percent will raise you you know to our you get five are your genius Ryan you're making a lot of money whoa you're really happy right but guess what after a while when you go through this phase you find that your trend following doesn't make money anymore you start to get frustrated that you bring even break even - one hour - one hour - one hour okay and what happens to some people is that once they start to lose some money here or not make money anymore they start to think that the strategy doesn't work anymore okay and there's this overwhelming temptation to change their strategy and say okay so this won't make you money what is making money right and they see someone who is doing a non-directional technique for example they're trading options or they are using a counter trend trading technique say hey I'm making all the money over here alright so I should be using a strategy right because their strategy works in this phase so what happens with this trader is you will start to abandon get trend following strategy and use this new strategy which is making money right but by the time they learn it guess what that's why the market goes on a downtrend and once the market goes on a downtrend these mean reversion or option strategies start to lose a lot of money and is it damn what's happening by the time I let a I'm losing money again and they didn't realize that if they start to get trend following style but instead of going on uptrend and I'll go on downtrend you'll be making money again okay and then what happens when they start to see the hey now the trend followings make money I want to go back to trend following but the money go back the trend following it goes sideways again and again they're losing money so they always lose money in every cycle because they keep switching strategies alright so the most important thing to to succeed as a trader is to stick to one or two strategies and keep trading the same system and mastery system and understand that all right it can't make money really well all the time okay but you keep using a same strategy right you make tremendous profits here he may break even lose a bit of money here make tremendous profits here and overall you'll be profitable and if that's anything that you learn from this video please let that stick to your strategy okay and master it the market rewards specialist and not general is that attend we do everything so that thank you for listening this Adam coup and you got any questions send me an email I'd be glad to help out take care

Channel: Adam Khoo

Views: 103,388

Keywords: adam khoo, adamkhoowealth1, wealthacademySG, stock trading, stock investing, technical analysis, ETFs, exchange traded funds, CFDs, wealth academy, AKLTG, stock investing for beginners, stock investing strategies, stock market, value investing

Id: z8Zatl-l23g

Length: 33min 55sec (2035 seconds)

Published: Mon Oct 24 2016