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Know Your Business Cycles
Briana Scurry
April 13, 2006
There are 4 cycles of business/economy that each stock trader needs to be aware of and understand.
This is primarily for the longer term stock trader, but regardless of your timeframes for trades its good to know the 4 cycles.
Expansion:
In this stage business activity increases throughout the economy and is when the ecomony is considered to be normal.
Peak:
As the economy starts to chug along it will eventually come to a peak, employment and income are on the rise. When full employment is approached
and incomes continue to rise this period is also known as prosperity or inflation.
Contraction:
As business activity starts to decline the overall economy is said to be going through a contraction. During this time there may
be a decline in GDP, if this happens for two or more quarters, it is called a recession. GDP is defined as the annual economic output of a nation.
Be aware that other variables are not taken into consideration when defining a recession. Factors such as unemployment and consumer confidence are
two such variables. It's hard to determine the beginning and the end of a recession.
Trough:
As definition explains this is the period at the bottom of the cycle where the recession begins to level off. This cycle can last for
several months and is a very tricky time for traders, many try to "call the bottom," and end up getting squeezed when a fake out occurs.
These are natural cycles of the economy, once you realize which one the economy is currently in you will be more aware of what stage is
next in order to be better educated with how to trade. For example, in the spring of 2000 until 2003 great fortunes were made by those who were
shoring stocks or playing put options since the ecomony was clearly in contraction.
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