Market Phases: A Comprehensive Breakdown
When analyzing market cycles, it's common to hear about the "Bear" and "Bull" markets. However, a complete cycle typically consists of four distinct phases that many overlook:
Phase 1: Bear Market
This phase is the most familiar to traders, as it often follows the euphoric peaks of the market. During the peak, prices rise sharply, attracting a flood of new participants. However, the subsequent downturn is prolonged and brutal, lasting 2 to 3 years. This period is characterized by a deep market breakdown, shaking out weak hands and leaving the market in despair.
Phase 2: Rebound
As the market reaches its lowest point, sentiment hits rock bottom. Traders experience disbelief, frustration, and even anger, while market activity slows to a crawl. Volume dwindles, new participants stay away, and many veterans begin to abandon the market altogether. Then, unexpectedly, a significant rebound occurs. Prices surge, in some cases even revisiting previous highs, delivering substantial returns to those still invested.
At this point, many traders mistakenly declare the start of a new bull market. The mood shifts to optimism, with emotions running high and the belief that the "bull run" has officially returned. However, this phase is often a false rally, setting the stage for further correction.
Phase 3: Bottom/Reset
This phase is the trickiest and most deceptive of all. Following the excitement of the rebound, most traders are caught off guard by the sudden “flush crash” that follows. Few anticipate it, and even fewer dare to predict it publicly due to the risk of backlash from the majority.
Uncertainty dominates this phase as traders wrestle with fear of missing out on another rally. Meanwhile, institutional players and whales, who distributed their holdings during the rebound, prepare to re-enter the market at significant discounts of 60-70%. During this phase, the majority remain convinced they are still in a bull market, not realizing another major correction is imminent.
Phase 4: Rally/Bull Market
By this stage, most participants have been flushed out. Those who remain often set sell orders near their original entry points, desperate to exit after enduring losses and frustration from earlier phases. Many are emotionally drained and skeptical of any recovery, having seen their portfolios reduced by 80-90% from peak values.
For instance, an initial $10,000 investment from Phase 1 might now be worth only $100. This crushing loss leads to anger and hopelessness, making it difficult for traders to believe the market will recover. Ironically, this phase marks the start of a genuine bull market, characterized by sustained upward momentum. However, by the time traders regain confidence, prices have already soared, leaving them chasing the rally.
Understanding these four phases provides clarity in navigating market cycles, helping traders avoid emotional traps and make informed decisions.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.