Market phases
In general, there are three market situations: an uptrend, a downtrend and a flat market.
Uptrend (Bullish trend) refers to a situation where the price of an asset shows an ascending movement, marked by increasing price lows.
Downtrend (Bearish trend) refers to a price movement of an asset that has a downward vector and is characterized by consistently lower price highs.
In any directional trending movement of an asset's price, there are two alternating stages: impulse movement and its correction.
Correction (pullback) is a situational occurrence characterized by a local price rollback in the opposite direction of the trend. Corrections can occur in both upward and downward trends. They can indicate a potential trend reversal or act as a local counter-trend movement before the trend resumes.
Flat market (sideways movement, ranging market) refers to a price movement characterized by the absence of a well-defined upward or downward trend, with the price trading within a restricted range. Usually, a flat market arises from the activities of market makers who accumulate, distribute, or re-accumulate significant positions.
Accumulation is a period of sideways movement in an asset that occurs following an extended downtrend. This situation often arises when the price reaches a zone of interest for buyers who find the current price levels acceptable for accumulating a significant position. However, in order to enter a trade with a large volume of funds, major players must gradually accumulate the required volume to prevent undesirable price movements.
Distribution is the opposite phenomenon of accumulation, characterized by sideways price movement of an asset following a significant price increase. In this case, the price has entered a seller's area of interest, where they will be realizing the profits obtained during a substantial price increase of the asset. When major players seek to lock in profits from a large-volume trade, they cannot do so instantly to avoid an unfavorable price drop. As a result, profits are systematically realized within a specific price range. A subsequent decrease in the asset's value invariably follows distribution.
Re-accumulation represents some modified form of accumulation where major players gradually increase volume in their positions. As it is not viable to rapidly accumulate a large volume without impacting the price, the asset's value is intentionally kept within a specific range, allowing major players to gradually accumulate their position. Often, after re-accumulation, the price continues its movement according to the previously established trend.
In practice, approximately 70% of the time, asset pricing remains in a flat, while only 30% of the time it exhibits a clear trend. Sideways price movement poses significant challenges for traders, leading to losses for the majority. Successful trading in such market conditions is highly problematic. Therefore, the optimal solution for most traders is to avoid active involvement during these market situations.
Our trading algorithm is capable of identifying flat market conditions and evaluate the width of the trading range to determine if it is sufficient for profitable trading. If the algorithm calculates that the trading range is too narrow to execute a profitable trade, the system disregards the sideways market until its completion. However, if the algorithm determines that the current sideways price action has a sufficient range for profitable trading, the system suggests opening trades that are appropriate for that particular situation.
Elliott Wave Theory is one of the most well-known methods for analyzing and forecasting financial markets. The idea behind it is that all market trends tend to follow certain behavioral patterns that repeat themselves consistently, regardless of the time frame.
Every trend consists of a specific sequence of waves. Some waves align with the primary trend, while others serve as corrective waves in relation to the trend.
At the top of the chart, you can see that the uptrend consists of 5 waves, where waves 1, 3, and 5 are impulse waves, while waves 2 and 4 are corrective waves in relation to the impulses. Upon the completion of the 5th wave, the trending movement reaches its culmination, after which a global corrective movement begins, which consists of waves A, B, and C. In the case of a global correction, wave B acts as a corrective wave in relation to the correction.
If you shift your focus to the middle part of the chart, you can observe that each impulse trend wave follows the same structure, but on a smaller scale. Wave 1 from the top of the chart consists of three impulse waves and two corrections of that impulse on the middle chart. The corrective wave 2 on the top chart contains corrective waves A, B, C on the middle chart, and so on. The lower part of the chart provides more detailed information about the waves in the middle section of the chart.
The same structure, but in a mirror reflection, is present in a downtrend.
By comprehending the present market phase and the precise position of price action, a trader can greatly enhance the accuracy of his price predictions and significantly improve the efficiency of his actions.