Market cycles are a fascinating aspect of technical analysis, allowing us to understand repetitive patterns in price behavior. The cycles and waves we observe in markets reflect human behavior, which—when acting collectively—tends to repeat certain patterns in response to changing economic, political, or social conditions.
Definition of Cycle and Wave
A cycle can be understood as a series of events that repeat at regular intervals. In financial markets, a cycle describes the periodic rises and falls in prices that follow one another in an orderly fashion, enabling the prediction of future price changes based on observed patterns.
A wave represents an individual price movement within a larger cycle. Waves may vary in amplitude and duration, but collectively they form a cyclical pattern that investors can analyze to identify potential market turning points.
Recognizing Cycles and Waves
The key to effectively using cyclicality in technical analysis is distinguishing between cycles and waves, and understanding that while you can have waves without a cycle, every cycle must consist of waves. Cycles are repetitive and can be anticipated, whereas waves exhibit greater volatility.
The Importance of Cyclicality
Understanding market cyclicality allows investors to better plan their actions, identify potential up- or down-trends, and manage risk more effectively. Cyclicality offers a unique perspective that complements traditional indicator-based technical analysis.
Business Cycles
Analyzing large-scale business cycles—such as the Kondratieff wave, infrastructure cycle, business cycle, and innovation cycle—provides insight into long-term market trends. Recognizing these cycles can help investors identify phases of expansion, peak, recession, and recovery in the economy.
Practical Application
Cyclic analysis requires advanced knowledge and experience, and the variety of cycle theories can sometimes lead to conflicting views among analysts. However, even a basic understanding of cycles and waves can be valuable, helping investors gain deeper market insight and make more informed decisions.
Introducing cyclicality is an important component of any technical analysis course, teaching participants that financial markets are not chaotic but follow regular patterns that can be studied and leveraged to improve investment outcomes.
In the case of Bitcoin and other cryptocurrency markets, cyclicality most often refers to Bitcoin’s halving events. These halvings mark the beginning of a highly repeatable pattern of price behavior.
