The 4 Stock Market Stages That Every Trader Should Know

The 4 Stock Market Stages That Every Trader Should Know - From http://www.swing-trade-stocks.com/stock-market-stages.html


To trade stocks successfully, you must first understand the four stock market stages that individual stocks and the overall market go through. These cycles tell you if you should be long, short or in cash.

Once you are able to identify what stage it is in, you can then trade accordingly to those characteristics.

After a while you won't even have to think about whether you should be long or short. You will know, without question, exactly what you should be doing NOW. You will either be focusing on long positions, short positions, or you will stay safely in cash - just by glancing at a chart!

Here are the four stages that stocks go through. This happens in all time frames whether it is a monthly chart, weekly chart, daily chart, or an intraday chart.

Ok, so I'm not the best artist in the world but I think it will serve our purpose here! What? You thought it would be more complicated that? My philosophy on the stock market is that if it is too complicated then it is just not worth doing. Now, we'll look at the characteristics of the four stock market stages. I promise it will be painless!

Stage One

Stage 1 is the stage right after a prolonged downtrend. This stock has been going down but now it is starting to trade sideways forming a base. The sellers who once had the upper hand are now beginning to lose their power because of the buyers starting to get more aggressive. The stock just drifts sideways without a clear trend. Everyone hates this stock!

Stage Two

Finally stocks break out into Stage 2 and begins the uptrend. Oh, the glory of stage 2!! Sometimes I have dreams of stocks in Stage 2! This is where the majority of the money is made in the stock market. But here is the funny thing: No one believes the rally! That's right, everyone still hates the stock. The fundamentals are bad, the outlook is negative, etc. But professional traders know better. They are accumulating shares and getting ready to dump it off to those getting in late. This sets up stage 3.

Stage Three

Finally, after the glorious advance of stage 2, the stock begins to trade sideways again and starts to "churn". Novice traders are just now getting in! This stage is very similar to stage 1. Buyers and sellers move into equilibrium again and the stock just drifts along. It is now ready to begin the next stage.

Stage Four

This is the dreaded downtrend for those that are long this stock. But, you know what the funny thing is? You guessed it. Nobody believes the downtrend! The fundamentals are probably still very good and everyone still loves this stock. They think the downtrend is just a "correction". Wrong! They hold and hold and hold, hoping it will reverse back up again. They probably bought at the end of Stage 2 or during Stage 3. Sorry, you lose. Checkmate!

Brilliant! The ever happening story in every trader's life. No matter how professional he has become.

Thank you sir for the post.

yes ...it true for the professionals but make more sense for novice......

Hi Anil,

I posted here so that it could help some forum members understand why a sloppy stock suddenly seems hot, and then after a time damp, and not going anywhere. When a stock is at stage 4, unfortunately many traders/investors who do not look at the charts start buying then, asthey think that this is a 'value buy' relative to the high price the stock has seen. To compound their woes, they keep adding to 'average' their cost while the professionals and big funds are dumping the stock....

Was just speaking to a friend the other day who trades by 'gut instinct' and has accumulated lots of stock at high prices, and has no 'time' or 'clue' about the charts. I was just thinking that the likes of him will end up making some money in the bull run, but end up being chopped meat when the market declines....

I understand what you mean sir. The real cause behind 90% traders losing there undergarments in the market is this circulated myth that trading is as easy as ABC and one can make millions in no time from stock market. Truth is, trading becomes easy and potentially very rewarding only after one goes through hell of a hard work to get oneself disciplined like a soldier. Before that trading is a wolf in sheepskin waiting to eat you alive. My personal parameter to know whether one is disciplined or not is to see the number of trades one puts in per week. If it is around 12, ok ok. If it is 5 or 6, good. If it is 3, very good.

Well said Anil, could not agree more.

Incidentally contrary to the advise that one should spread their risk, I came across the strategy of a successful professional trader. As per him, when you have a good opportunity in terms of setup, risk reward etc, go in for a bigger position size. This is how big traders make money, tracking fewer stocks and going in for the best opportunity available.

The rider for this is however that one has to be very clear and strict with stop loss levels.

Absolutely right sir. Less clutter on the watchlist there is more clarity comes to trading naturally. However I have seen posts in zerodha's thread saying 50-100 scrips on watchlist is normal activity. I thought if that is so then when do these gentlemen get time to trade? It reminded me of that mahabharat story. Everybody was busy seeing leaves and branches, only Arjun was deadset on the single eye of the toybird.

Anil, my views are a bit different and plead guilty.

My question is, why would you want to restrict yourself to seeing a few charts.? Basically, what you are looking for is for is a certain setup to reflect on the chart. The lesser charts that I view, the lesser probability I have of finding one.

Having said that, I would not trade a setup if the script is relatively ill-liquid, or the move is too shallow or relatively not mature and establishes itself for a few fleeting moments.

I personally have the full Nifty futures scriplist, which I review for trading. Even if I may not trade it, I can view and learn from the unfolding story.

BTW, I have enough time to do this, as there is nothing else that I do besides!

It is not restricting oneself sir but being selective. And I am positive that you are intelligent enough to understand the difference between the two. Point is that one should scan as many scrips as one wants but not at the time of trading. The scanning should be done in the evening, the best candidates selected as per one's account size and only those should remain in the watchlist that are being strong movers early next day. Rest of them should be removed from the view. At least that is what I do. Besides it is known fact that for maximum profit one should not exceed 2 trades at a given time. Sometimes I just keep only one scrip along with its derivatives on my watchlist for weeks if by chance I am able to enter it at the begining of the move.

Thanks Anil,

Discussion with you and other traders has only helped me to broaden my understanding of the market and the art of trading.

I have been guilty of many faults, and now my endeavour is to prune the negatives and and to add the positives that I learn everyday thru experience as well as other means including the discussion board.

The ultimate objective is to be as good a trader as any other, and I feel this is a lifelong lesson in learning.

Thanks to you for being part of that journey.