What happens at each stage of the market cycle?

This picture is of vital importance.

It's something that you simply have to try to recognise when trading, whether you're multi asset, trading only crypto, FX, equities - it simply doesn't matter, since sentiment is indiscriminate and uncaring as to your asset class.

In each section, we've got what is occurring at each stage.

1) Risk off.

2) The start of the crisis management

3) Risk on

4) Caution

On the right hand side of each diagram shows what generally is bought during these periods, and how your portfolio *could* be constructed.

And at the bottom, is what is generally sold off.

What we always have to remember is this...

'How do we optimally construct our trade ideas/portfolio to make best use of the current market condition?'

A trade that you think should come off under one market condition (especially if you're technicals focused) might not work, since the market context doesn't support the trade's success.

Key to this is understand the beta of different asset classes to.

Let's take FX.

AUD, GBP, CAD and emerging market currencies are all high beta.

Here's the equation to work out beta of say, EURUSD...

Beta (EURUSD) = StdDev (EURUSD) / StdDev (market average)

This implies that they move pretty heavily in line with risk sentiment and probably have outsized returns relative to the average.

Countering this, EUR and JPY tend to be pretty low beta, predominantly due to their respective central bank policies.

Being long AUD on a return to caution (as I believe we are in now, for example, on a technicals basis would probably be the incorrect thing to do.

Priming yourself not necessarily to forecast, but to get to grips with where we are now and whether anything can change based on certain factors is absolutely vital.

Thanks for reading, and let me know in the comments if you would like a full image of this!