What is the Business Cycle?

What is the Business Cycle?

The business cycle tracks the recurring expansion and contraction of economic activity. Aligning trades with the cycle improves timing because pro-cyclical currencies rally when growth accelerates and defensive currencies shine during contractions.

Four Main Phases

• Expansion: Rising GDP, employment, and corporate profits.
• Peak: Growth slows as capacity tightens and inflation builds.
• Contraction: Output and hiring decline, risk appetite fades.
• Trough: Activity bottoms before the next recovery begins.

Monitoring the Cycle

• Leading indicators: PMI surveys and consumer confidence turn first.
• Yield curve: Inversion often warns of recession.
• Corporate earnings: Company guidance reveals demand trends.
• Policy tone: Central-bank rhetoric shifts with the phase.

FX Applications

Pair pro‑cyclical currencies (AUD, NZD, CAD) with defensives (USD, JPY, CHF) based on where regions sit in the cycle. When Europe slows while the U.S. accelerates, EUR/USD often trends lower as policy paths diverge.

Practical Playbook

• Define context on higher timeframes, then execute on intraday charts.
• Wait for confirmation (acceptance, momentum, or confluence) before entry.
• Size positions conservatively and place stops at clear invalidation levels.
• Adapt to session dynamics; conditions shift between Asia, London, and New York.

Common Pitfalls

• Forcing trades without alignment across timeframe, structure, and catalyst.
• Ignoring spreads/slippage during news or thin liquidity.
• Moving stops or adding to losers instead of honoring the plan.

Illustrative Example

Build a simple playbook: identify bias, mark key zones/levels, define triggers and invalidation, and pre‑set targets for 2–3R. Journal results by session and setup to refine rules. Over time, consistency—not prediction—drives outcomes.

Practical Playbook

• Define context on higher timeframes, then execute on intraday charts.
• Wait for confirmation (acceptance, momentum, or confluence) before entry.
• Size positions conservatively and place stops at clear invalidation levels.
• Adapt to session dynamics; conditions shift between Asia, London, and New York.

Common Pitfalls

• Forcing trades without alignment across timeframe, structure, and catalyst.
• Ignoring spreads/slippage during news or thin liquidity.
• Moving stops or adding to losers instead of honoring the plan.

Illustrative Example

Build a simple playbook: identify bias, mark key zones/levels, define triggers and invalidation, and pre‑set targets for 2–3R. Journal results by session and setup to refine rules. Over time, consistency—not prediction—drives outcomes.