Have you encountered a new trading method that earns money initially, but then stops working?
The explanation for this phenomenon is straightforward. Markets are in constant flux.
Therefore, before anything else, you must comprehend the four stock market phases that both specific stocks and the market as a whole pass through. The markets will no longer look to be unpredictable if an investor knows the stages. The trader may recognize each phase and make necessary adjustments to their trading strategy.
The four stages in the stock market cycle are as below.
- The Accumulation Phase:
The accumulation begins as soon as the market reaches its lowest point. The stock tends to wander as traders collect their shares before the market’s ‘breakout.’
Money managers, value investors, and experienced traders begin buying shares after concluding that the worst has passed. The thing that becomes significantly important is the valuation.
It is preferable to wait until the establishment of the market trend before making significant trades. During this time, the price range is narrow, making it difficult for day traders to profit.
- The Run-Up Phase:
As the accumulation phase’s breakout leads to a significant number of shares, traders who kept silent throughout the accumulation phase rapidly acquire equities. As a result, the tendency is upward as the market gains strength and progresses to the next stage.
The run-up phase is the most profitable period for a trader. It is when every downward trend is viewed as an opportunity to buy shares rather than as a negative trend. There is a lot of price movement in the upward direction, which is ideal for momentum traders for trading stocks.
- The Distribution Phase:
Sellers take control in this third phase of the market cycle. Usually, distribution follows a price increase and appears as a phase of price consolidation. Price begins to fall back and trades sideways as demand no longer surpasses supply. A point of time when investors who bought equities during the accumulation phase start to sell them.
The change is gradual and might take a long time. Over several months, prices tend to remain quite stable. It is sometimes known as a bear market.
There is a lot of volatility in the early phases when investors begin to depart the market; it presents a fantastic chance for shorting. It will rebound quickly once the market strikes the bottom.
- Run-down Phase or Decline Phase:
During the distribution period, traders who purchased equities are in a hurry to sell in this run-down phase since they are losing money. However, there aren’t enough buyers to meet the share demand. The absence of demand causes stock values to decrease.
Investors will lose money if they sell during a market decline. Many investors have concluded that they won’t suffer a loss if they remain patient and wait for the upturn.
A bear market might be a terrific opportunity for long transactions if investors use the proper strategies. During this period, it is vital not to worry and sell since these periods don’t last very long.
Studying stock cycles gives investors an early warning of a stock’s movements. It enables the investor to devise a profit-generating strategy based on the current price movement.
You may now use this knowledge to understand risk management. Implementing a stop-loss in your trade management strategy may assist you in maximizing your winnings.
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