Market Phases - Every trader must knowMarket Phases -Stock prices may appear random, but there are repeating price cycles, which are predominantly driven by the market participation. Below are the four types of market phases that occur.
Phase 1: Accumulation - The accumulation phase is a stage of consolidation. There is no clear trend, and the stock is usually trading in a range. It's a span of time in which traders and institutions are slowly accumulating shares, but the market has not broke out yet. Trend traders finds difficulty to trade.
Phase 2: Advancing - During the advancing phase, price breaks out of range (comes out of the accumulation phase) and begins a sustained uptrend. This stage is when the price begins moving up. The big money has established a position and retail investors are now invited to join in the profit party. This is the most profitable time to own the stock – an opportunity to let your profits run.
Phase 3: Distribution - The distribution phase begins as the advancing phase ends and price enters another range period. The shares are being sold over a period of time—the opposite of accumulation. This time, the sellers want to maintain higher prices until the shares are sold.
Phase 4: Declining - During the declining phase, price breaks out of the range (comes out of the distribution phase) and begins downtrend. This stage comes after distribution when price begins moving down.
Now lets understand them one by one in detail :-
1.)Accumulation phase where trend traders find difficulty to trade
Accumulation usually occurs after a fall in prices and looks like a consolidation period.
Characteristics of accumulation phase:
It usually occurs when prices have fallen over the last 6 months or more
It can last anywhere from months to even years
It looks like a long period of consolidation during a downtrend
Price is contained within a range as bulls & bears are in equilibrium
The ratio of up days to down days are pretty much equal
The 200-day moving average tends to flatten out after a price decline
Price tends to whip back and forth around the 200-day moving average
Volatility tends to be low due to the lack of interest
Examples of Accumulation -
How To Trade Accumulation ??
1.)Sell At Resistance
2.)Buy At Support
Do not go blindly short at resistance, wait for any reversal candle or look for any negative price action in smaller TF. Look for reversal candles
Never buy blindly on support. Look for reversal candles. Switch to smaller Time-frame find a bullish price action/ bullish chart patterns.
Never Ever Trade At Midpoint In A Range Market. You never no where it will head, to the the support area or to the resistance area.
2.)Advancing phase which trend traders love — Best trading strategy is to long the uptrend
After price breaks out of the accumulation phase, it goes into an advancing phase (an uptrend) and consists of higher highs and lows.
Characteristics of advancing phase:
It usually occurs after price breaks out of accumulation phase
It can last anywhere from months to even years
Price forms a series of higher highs and higher lows
Price is trading higher over time
There are more up days than down days
Short term moving averages are above long-term moving averages (e.g. 50 above 200-day ma)
The 200-day moving average is pointing higher
Price is above the 200-day moving average
Volatility tends to be high at the late stage of advancing phase due to strong interest
Examples of Advancing
How To Trade Advancing ??
1.)Breakout Trading - Where you above the highs
2.)Pullback Trading - Where you buy support which was earlier a resistance. This is called change in polarity.
Avoid Trading against the trend. If you trade then take small profits. You will get max with the trend.
3.)Distribution phase- - Distribution usually occurs after a rise in prices and looks like a consolidation period.
Characteristics of distribution phase:
It usually occurs when prices have risen over the last 6 months or more
It can last anywhere from months to even years
It looks like a long period of consolidation during an uptrend
Price is contained within a range as bulls & bears are in equilibrium
The ratio of up days to down days are pretty much equal
The 200-day moving average tends to flatten out after a price decline
Price tends to whip back and forth around the 200-day moving average
Volatility tends to be high because it has captured the attention of most traders
Examples of Distribution :-
How To Trade Distribution ??
1.)Sell On Resistance
2.)Buy On Support
Do not go blindly short at resistance, wait for any reversal candle or look for any negative price action in smaller TF. Look for reversal candles
Never buy blindly on support. Look for reversal candles. Switch to smaller Time-frame find a bullish price action/ bullish chart patterns.
Never Ever Trade At Midpoint In A Range Market. You never no where it will head, to the the support area or to the resistance are.
4.Declining phase - Best trading strategy is to short the downtrend
After price breaks down of the distribution phase, it goes into a declining phase (a downtrend) and consists of lower highs and lows.
This is the stage where traders who do not cut their loss become long-term investors.
Characteristics of declining phase:
It usually occurs after price breaks out of distribution phase
It can last anywhere from months to even years
Price forms a series of lower highs and lower lows
Price is trading lower over time
There are more down days than up days
Short term moving averages are below long-term moving averages (e.g. 50 below 200-day ma)
The 200-day moving average is pointing lower
Price is below the 200-day moving average
Volatility tends to be high due to panic and fear in the markets
Examples of declining :-
How To Trade Declining ??
1.)Breakdown Trading - Where you sell below the lows
2.)Pullback Trading - Where you sell on rise after a breakdown. Supports turned into resistance. This is called change in polarity.
Avoid Trading against the trend. If you trade then take small profits. You will get max with the trend.
Hope you all learnt from this post. Share with the community if you liked it.
Regards
Omahto
