Trading in cyclical stocks

With cyclical stocks you can earn a lot of money. Cyclical stocks usually move with the market conditions. This means that the prices of these stocks, compared to stocks in general, go up a lot more when the economy is improving and go down a lot more when the economy worsens.

Demand moves in cyclical waves

The economy doesn’t grow in one steady line; usually an economy will grow gradually and encounter necessary ups and downs. When the economy is growing quickly, there is usually a high demand for products. We call this the ‘boom times’. When the economy is in a downward trend, demand for most products decreases and sellers struggle with low market conditions.

Cyclical stocks are stocks that are closely related to the movement of the economy. They are more sensitive to economic developments and move up and down more extensively than other stocks. If you want to maintain a stable stock portfolio, having cyclical stocks can be tricky. However, by using the right tricks you can still profit from these large fluctuations.

cyclical stocks

Important note: anti-cyclical stocks move against the economic trends.

How to profit from an unstable price

You can profit from an unstable price by using an online broker. Online brokers enable you to go both long and short. When going long, you profit from increases in price and when going short you earn a profit when the price goes down.

Because the transaction fees are lower at online brokers, you can open and close positions on stocks very quickly. This means you can profit from the large fluctuations that cyclical stocks go through.

Strategy with cyclical stocks

Cyclical stocks are rather turbulent, but you can still predict the future price of these stocks pretty accurately. In the long term, a cyclical stock will decrease value as the economy cools down and will increase in value as the economy heats up.

In the short term, you can spot patterns within these movements. The price of a stock moves down within certain values and will gradually go up until it reaches a certain resistance level. By using orders in a smart way, you can profit from trading cyclical stocks.

Where to trade

When trading stocks that fluctuate very heavily, it's generally not recommended to buy physical stocks for the long term. You can't just short sell physical stocks, so you can't profit from these short ups and downs. By trading stocks through an online broker, however, you can profit from trading in the short term thus increasing your potential profits.

It is rather simple to start trading stocks with an online broker. Most of the time, you only need to fill out a few details and you can start right away. My favourite broker for trading stocks is Plus500 because you get a free demo of £40.000 just for signing up. You can use that money to try trading CFD stocks without risk right away!

Tip: There are also defensive stocks; stocks that hardly move with the cycles of the economy.

Useful links: start trading directly!

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