The four-stage investment rule for mastering market cycles

To achieve stable profits in investing, you must first understand a fundamental concept: Market Cycles. Many novice investors are often confused by short-term fluctuations. In fact, if you can identify which stage the market is currently in, you can significantly improve your decision-making success rate.

What Are Market Cycles?

Market cycles refer to the development pattern where the market changes with the environment, falling from a peak to a trough, then rebounding and rising again, repeating in a cycle. Simply put, the market will never only go up or only go down; instead, it continually evolves through this cycle.

Famous investment master Howard Marks once proposed that multiple factors such as economic markets, corporate profits, investor psychology, and credit flow are cyclical. These subsystems may seem independent but are interconnected, ultimately reflecting in the overall market cycle.

Two Main Characteristics of Market Cycles

Characteristic One: Swinging Like a Pendulum

The market is like a pendulum, never staying at the midpoint forever but continuously swinging to both sides. The more extreme the swing, the stronger the rebound. When bubbles grow larger, the damage caused by bursting is also deeper. This is why observing the market at its extremes is very important.

Characteristic Two: Flexible Time Span

The length of market cycles has no fixed answer. Short-term traders might experience a complete cycle in 10 minutes, while medium to long-term investors may wait a year. Investors tracking super cycles (such as Kondratiev waves or Elliott waves) might wait up to 60 years to see a full loop.

The Four Stages of Market Cycles and Their Features

Although it’s difficult to precisely determine the start and end points of each cycle, the essential process remains consistent: rising to a peak, then falling to a trough, and starting a new cycle. The entire process is divided into four clear stages:

Stage One: Accumulation Phase — Hiding Gold in the Market

When a cycle hits bottom, the accumulation phase follows. During this period, the market is overly bearish, yet it’s the best buying window—because prices have already fallen as far as they can go.

To judge whether the market has truly bottomed, observe if technical charts show reversal signals, such as head and shoulders, double bottoms, triple bottoms, and other classic patterns. These formations suggest that the price trend is about to change direction.

At this stage, investors should:

• Closely monitor market trends and news
• Learn to identify buy signals from technical analysis
• Prepare sufficient funds to act decisively when opportunities arise

Stage Two: Uptrend Phase — Riding the Wave Up

The market begins to consolidate, with initial gains attracting the first wave of investors. As prices reach new highs and lows continue to rise, technical indicators send buy signals. Market sentiment shifts from optimism to bullishness, with continuous buy orders pushing prices higher.

When most investors follow the trend and buy in, it provides the final momentum for the rally, pushing prices to historic highs. Early smart investors often take this opportunity to gradually exit as new buy orders flood in.

Technical traders buy on higher lows to follow the trend, while fundamental traders look for buy signals from positive news or improving corporate profits.

Stage Three: Distribution Phase — Quietly Offloading

After the rally ends, the distribution phase begins. At this point, the market no longer hits new highs, buying momentum slows significantly, and sentiment shifts from optimism to neutrality or caution. Toward the end of this phase, economic data may start to underperform, and bearish sentiment gradually takes hold.

This is an excellent exit point for technical traders—when prices reach new highs and valuations peak, it’s time to sell. Fundamental investors adopt a wait-and-see attitude, only exiting when fundamentals clearly deteriorate.

Stage Four: Downtrend Phase — Exiting Quickly

Market sentiment turns extremely pessimistic, with investors rushing to sell to lock in profits, intensifying downward pressure and triggering a vicious cycle of selling. Even if prices hit new lows, holders often cling to hope for a rebound. However, with fundamentals worsening and selling pressure persisting, prices continue to bottom out. Once the bottom is reached, it creates new buying opportunities for latecomers, and a new market cycle begins anew.

How to Respond to Market Cycles in Practice

Key Task: Assess Your Current Position

Investors cannot predict the future, but they can accurately determine where they are now. The three tasks are:

• Evaluate the current price level
• Estimate potential price movements
• Infer future development directions

This requires continuous tracking of price trends, data movements, market news, and keen observation of market sentiment, investor psychology, and risk appetite.

Core Strategy: Adjust Asset Allocation

Bottom-up positioning strategy: The cheapest prices are always worth waiting for. This demands patience, discipline, and a deep understanding of reasonable price ranges to effectively act at true lows.

Risk management strategies: Two main risks in investing need attention—

First is loss risk. No investor can avoid losses forever; price volatility is a prerequisite for profit. Recognizing this reality, only invest funds you can afford to lose.

Second is missed opportunity risk. Golden buying opportunities may only appear once every ten years or vanish in an instant. Balancing this uncertainty tests an investor’s risk awareness.

Gradual Positioning Strategy: Even seasoned investors find it hard to pinpoint the perfect entry point. Staggered buying can average costs and avoid the risk of buying at a high, making it a more pragmatic approach.

Ultimate Wisdom of Investment Cycles

Understanding the operational logic of each stage of the market cycle is fundamentally about learning how to increase profit probabilities. Markets have highs and lows; sometimes you need to defend, sometimes wait patiently, and sometimes actively deploy. Mastering this rhythm can reduce risks and strengthen investment resilience.

True investment wisdom is not about working tirelessly or trading frequently, but about making correct asset allocation adjustments at the right times (market cycle positions). Grasping market cycles helps identify buy and sell opportunities, stabilize cash flow, predict market trends, and avoid being caught off guard by sudden bubbles. Timely stop-loss and take-profit are key to navigating market cycles with ease.