The Four Market Phases
In SMC trading, all markets move through four distinct phases, each with specific characteristics and trading opportunities. Understanding these phases allows you to predict where markets are heading and position accordingly.
Phase 1: Accumulation
Accumulation is when smart money buys after price has fallen significantly. Characteristics include:
- Price is at or near long-term lows
- Volume increases despite price staying relatively flat
- Small trading range (indecision)
- Retail traders are frustrated and selling
- Smart money absorbs all selling pressure without price moving up
- Duration: Can last weeks or months
How to trade: Identify demand zones forming during accumulation. Small long positions at support work well, but be patient – the market may stay flat for extended periods.
Phase 2: Markup (Impulsive Phase)
Markup is the strong trending phase where price rises significantly after accumulation. Characteristics include:
- Large bullish candles with increasing volume
- Price creates higher lows and higher highs consistently
- Pullbacks are shallow and quickly reversed
- Retail traders gradually become bullish and buy
- Smart money takes partial profits but continues buying
- Clear uptrend structure forms (higher lows)
How to trade: This is the best phase for trend trading. Buy pullbacks to order blocks and support levels. Risk is lowest and rewards are highest during markup.
Phase 3: Distribution
Distribution is when smart money sells after a significant markup. Characteristics include:
- Price reaches or near long-term highs
- Volume increases despite price staying relatively flat
- Candles become smaller (diminishing momentum)
- Retail traders are euphoric and buying aggressively
- Smart money absorbs all buying pressure without price moving down
- Formation of change of character (CHoCH) signals
How to trade: Avoid long trades during distribution. Watch for rejection signals at resistance. Position sizing should be minimal until clear downtrend confirmation appears.
Phase 4: Markdown (Declining Phase)
Markdown is the strong downtrend phase where price falls significantly after distribution. Characteristics include:
- Large bearish candles with increasing volume
- Price creates lower highs and lower lows consistently
- Rallies are shallow and quickly reversed
- Retail traders eventually become bearish and sell
- Smart money takes short profits but continues selling
- Clear downtrend structure forms (lower highs)
How to trade: Short pullbacks to resistance levels and order blocks. Avoid buying during markdown regardless of how low prices fall.
Identifying Phases on Your Charts
- Accumulation: Look for small range + increasing volume + near-term lows
- Markup: Look for large candles + increasing volume + higher lows
- Distribution: Look for small range + increasing volume + near-term highs
- Markdown: Look for large candles + increasing volume + lower highs
Real-World Phase Example
EUR/USD after major news event falls from 1.1200 to 1.0900 in one week (markdown phase). Price then consolidates between 1.0900-1.0950 for 3 weeks with increasing volume (accumulation phase). After accumulation, price breaks out above 1.0950 and rallies 300 pips to 1.1250 in one month (markup phase). At 1.1250, price struggles to make new highs and trades sideways for 2 weeks (distribution phase). Traders anticipating this cycle would have bought at 1.0950 (end of accumulation) and sold near 1.1250 (beginning of distribution).
FAQ
A: Occasionally, but rarely. Strong news events can compress or accelerate phases, but the general cycle repeats continuously.
A: Accumulation/Distribution phases last weeks to months. Markup/Markdown phases last days to weeks. Higher timeframes show longer phases.