Forex Traders and investors need to have a deep and accurate understanding of the market and the economy at large in order to be able to make the right decisions. There are many different ways in which this understanding can be gained and obtained. But one particular way, which is also the subject of this inquiry, is to look at the cycles that form in the economy and the financial world.
So in this article we want to take an in-depth look at these cycles that are seen all the time in all economies in the world. These cycles go by different names, including financial cycles, economic cycles, business cycles, and even monetary cycles. Let’s see what they are, what causes them, and how you can use them to your advantage.
What Is the Meaning of an Economic Cycle?
In order to understand economic cycles, which are also known as financial cycles or monetary cycles, you first need to understand that economy is not a fixed notion. An economy is by nature dynamic and moving. It changes from one state to the other and it keeps changing as the different factors involved in it evolve and devolve.
So at any one point, an economy might be in a certain state or condition. These states of the economy are known as its cycles. This means economic cycles are basically the different stages that an economy goes through.
It is precisely through these stages or cycles that we can determine the status of an economy and how well it may or may not be doing. By examining such cycles, one can obtain valuable information about that economy. For instance you can understand where that economy is and how long it is going to remain in that condition. Such information can help you make a better decision about if you should make an investment move or not.
We are going to show you exactly what these cycles in an economy are, but first, let’s see what factors cause them.
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What Factors Cause an Economic Cycle?
There are different and innumerable cogs in the machine that runs the economy. All these little bits and pieces, all these economic parts, pull together to make the economy run smoothly. As a result, each one of the parts can be influential in the cycles that form in the economy.
Among the most important factors are the following items:
- GDP or gross domestic product. You probably know that the GDP of any economy is perhaps one of the most important indicators of how well it is doing. Naturally, if the GDP of a given economy is high and increasing, it means that the economy is moving toward a positive cycle of growth. The opposite is just as well correct.
- Employment rates are another crucially determining factor when it comes to economic cycles. There is yet another positive correlation between employment rates and the cycles of the economy. When employment rates are doing well, the economy will move toward a higher cycle.
- Production rates are where most cycles begin. You can easily see how positive and high rates of production will make the economy move and drive it forward and vice versa.
- Consumer spending is yet another factor that both causes economic cycles and also helps us understand which cycle is in motion at the moment. Here is where we also have a positive correlation between consumer spending and higher economic cycles.
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What are the Stages Involved in an Economic Cycle?
Let’s recap and see what we learned so far. Up to this point in the article we saw that the terms economic cycles, business cycles, monetary cycles, and financial cycles are interchangeable terms about the different stages in an economy, and we also discussed the factors that cause these cycles.
Now let’s take a look at the actual cycles themselves. Overall, an entire economic cycle is comprised of four stages:
- Expanding: as the name suggests, this is where things take off and get moving in the economy. This is where we see positive rates of employment, production, consumer spending, and as a result a high GDP. This stage is usually good for investing and starting new businesses.
- Peaking: the cycle of peaking occurs when an economy reaches its highest possible status in the course of the economic cycle. This is where things peak and it can be different for each economy based on its peculiar features. It might take much longer for certain economies to peak. While others might peak much sooner. This is directly tied to the capacity of that economy or booming prosperity.
- Contracting: the stage of contracting occurs after an economy has peaked. This is when an economy has reached its highest possible point in that cycle and then things start going downward. At this stage production usually falls, which leads to lower employment rates, which itself leads to a lower consumer spending and so the economy might move into a state of recession or decline.
- Trough: this is the last stage in an economic cycle and this is where things hit their rock bottom. Again, the extent to which this fall can be deep and sharp depends on the specific economy. Some economies might fall harder and go deeper in this stage of trough. While for others this stage might not seem so gloomy. In any case, this is where we have the economy in its lowest point and if the economy gets stuck in this stage that is when a full blown economic recession will occur.
These were the four stages that are involved in any full economic cycle. You need to have an understanding of these cycles because they will help you make better financial decisions, whether as an investor in the stock market or a trader in the forex market.
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Conclusion
To be successful as a trader or as an investor, you need to be able to detect patterns and paradigms that exist in the market and in the economy as a whole. Some of the most important patterns that you need to be able to detect are economic or monetary cycles. In this article we discussed the different stages and factors involved in economic and monetary cycles and how they begin.
