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You have seen the diagram. A smooth wave in four labelled stages, with arrows showing exactly where to buy and where to sell. It appears in every article on this subject, and it is the most misleading picture in trading education.
Not because the stages are wrong. They are real. It is misleading because the diagram is drawn on a chart where the turns have already happened, and that is the only time they are obvious.
The four stages, briefly
The words are worth knowing, so here they are without the arrows.
| Stage | What price is doing | What it feels like at the time |
|---|---|---|
| Accumulation | Moving sideways after a long decline | Boring. Nothing works. Most people have stopped watching |
| Markup | Higher highs and higher lows | Obvious in hindsight. At the time it looks like another failed bounce |
| Distribution | Sideways after a long rise, with sharper swings | Like a pause before the next leg up. That is what makes it work |
| Markdown | Lower highs and lower lows | Like a buying opportunity, again and again |
Look at the third column. Every stage feels like the previous one carrying on, which is exactly why you cannot see the change while you are standing in it.
Why the diagram lies
Take any textbook cycle picture and cover the right half. What is left is unclear. The dip the diagram labels “start of markdown” looks exactly like the twelve pullbacks during markup that came before it and went on to new highs.
This problem runs through all of technical analysis. A pattern is defined by how it ended. A head and shoulders is only a head and shoulders once the neckline breaks. Before that, it is a chart. A cycle top is only a top once the market has stopped making new highs, and you learn that some time after it stopped.
So the honest position is this. Stages are a useful way to describe what happened. They are a poor tool for predicting what happens next. Anyone showing you the diagram with entry arrows on it is showing you the past, drawn with perfect hindsight.
The reversal that turned out to be a pullback
I once read a pullback as the top of an entire trend. Price came down hard enough to look like the end of something, so I started opening positions the other way, sure that I was early to a big move down rather than late to a small one.
It was a correction inside a strong uptrend, and it took my positions apart completely.
The uncomfortable part is that at the time, nothing on my screen said pullback rather than reversal. The two look identical while they are happening. Only one of them is still going a week later.
What I took from it is the rule I still use. Until the structure breaks on a higher timeframe than the one I am trading, the trend that was in force is still in force, and my opinion about where the cycle has reached does not change that.
What you can actually see in real time
Giving up on predicting the stage does not leave you with nothing. Some things about current conditions can be seen rather than guessed, and they are more useful.
| What you can see now | What it suggests | What it does not tell you |
|---|---|---|
| Higher highs and higher lows | The trend is currently up | Whether it continues tomorrow |
| Price moving inside a range | Conditions are currently range-bound | Which way it breaks, or when |
| Volatility expanding | Bigger moves, and bigger stop distances needed | The direction of those moves |
| Volatility contracting | Smaller ranges. Breakout strategies will fail more often | That a big move is due. Quiet can last a long time |
| Volume rising into new highs | Buyers are supporting the move | That it will not reverse |
| New highs on falling volume | Fewer buyers at these prices | That a top is in. This can run for months |
Every row has a third column, and that is the point. These describe the present. None of them predicts. And the ones most often sold as signals, like falling volume into highs, can go on far longer than any account can wait.
Adjust the strategy, do not forecast the stage
Here is the practical version. Instead of asking which stage we are in, ask which conditions are present, and whether your strategy suits them.
| Current conditions | Tends to work | Tends to fail |
|---|---|---|
| Clear trend, expanding ranges | Trend following, holding for bigger targets, pullback entries | Fading moves, tight mean-reversion targets |
| Range-bound, contracting volatility | Fading the edges of the range, smaller targets | Breakout entries. Most break and come straight back |
| Choppy, no clear structure | Not trading | Everything else |
The third row is a real answer, and it is the one people skip. A strategy that works in a trend will lose steadily in chop, and that loss does not mean the strategy is broken. It means it is being used in the wrong conditions. That is why your record needs to note conditions as well as results. More on telling those apart in how to know if your strategy works.
What the cycle is not
- It is not a calendar. Stages have no fixed length. Accumulation can last two weeks or four years, and nothing in the pattern tells you which.
- It is not symmetrical. The neat wave in the diagram is a drawing habit. Real markdowns are usually faster and steeper than the markup before them.
- It is not one cycle. A weekly chart and a five-minute chart can be in different stages at the same time, and both are correct.
- It does not repeat on schedule. “We are due for a correction” is not an observation. It is a feeling with a chart attached.
Common questions
How do I know what stage of the market cycle we are in?
With confidence, you do not, and neither does anyone showing you a diagram with today marked on it. What you can establish is whether price is trending or ranging, and whether volatility is expanding or contracting. That is less satisfying and much more useful, because you can check it.
How long does a market cycle last?
There is no standard length. Any number you are given is an average of past cycles that varied enormously around it. The cycle is a shape, not a duration.
Can I use indicators to identify the stage?
Indicators are calculations on past prices, so they have the same problem: they confirm a change after it has happened. That is not useless, confirmation has value. But an indicator that spots the top will spot it after the top, which is a different product from the one usually advertised.
Is this true of crypto and forex as well as shares?
The four stage description applies anywhere there is a market, and so does the hindsight problem. If anything it is worse in faster markets, where the same shape appears on every timeframe and tempts people to call turns several times a day.
The short version
The four stages are a good description of the past and a poor forecast of the future. In real time, a pullback and the start of a decline look identical, and they look identical on purpose.
Stop trying to name the stage. Describe the conditions you can actually see, pick the strategy that suits them, and accept that you will recognise the turn some time after it happened. Everyone does. The people who claim otherwise are showing you the right half of the chart.