In this post, we are going to discuss the share market phases that every trader should know.
Let’s get started. These cycles are often influenced by numerous factors at each stage. Likewise, cycles also affect the movements of shares in market. Understanding how these movements can help a trader identify new trading opportunities and lower their risk. Once an investor understands the share market phases phases, the markets will not seem so random anymore. The trader can recognize each phase and change their style of trading accordingly. There are four phases in the stock market cycle as follows:
1.Share Market Phases
1.1 Accumulation
1.2. Mark-Up or run up phase.
1.3. Distribution
1.4. Downtrend
1. The Accumulation Phase:
The accumulation takes place immediately after the market reaches the bottom. After figuring that the worst is over, value investors, money managers, and experienced traders start buying securities, and valuations become extremely important. During the period, the market sentiment makes a switch from being negative to neutral. However, the market is still bearish.
However, spotting the beginning of the accumulation phase is not an easy task as markets are generally still in a downtrend. A good idea to get a feeling of the current phase of the market cycle is to follow market news.
Flows are becoming increasingly bullish and prices have difficult times to form fresh lower lows which also offers buying opportunities from a technical standpoint. Try to look for usual reversal patterns, such as inverse head and shoulders patterns, and double and triple bottoms.
How to Trade:
The accumulation phase may last a few weeks or a few months. So use this time to study the market and anticipate the right time to enter. The price range during this period is small and not particularly advantageous for day traders. It is advisable not to make large trades at this time until a market trend is confirmed. A current event in the economy can take stock out of this phase as you begin to see an uptrend. Once this accumulation phase is broken, you begin to see highs and lows in the market as we move on to the run-up phase of the market.
2. Mark-Up or run up phase
The breakout of the accumulation phase results in a high volume of shares as the traders who remained silent during the accumulation phase aggressively purchase stocks. During the markup stage, investors begin to jump in by the large, and a substantial rise in market volumes is observed. Valuations start climbing over historical norms, but unemployment and layoff continue to grow.
Since prices start to form fresh higher highs and higher lows, technical tools also start to send buying signals and the general market sentiment begins to change.
How to trade:
This is the best time for a trader to make money. There is a lot of upward movement of prices which is great for momentum traders. Any downward trend during this period is not viewed as a bad thing but rather an opportunity to buy shares. When the market goes down, the shares will get bought up as the market begins to trend again. The run-up phase is best for swing or short-term traders. As this phase progresses, the volatility in the market decreases as prices move slowly every day.
3. Distribution Phase
The distribution phase is the third phase of the market cycle, wherein traders start selling securities. The market sentiment goes from being bullish to mixed. It is the period at the end of which the market changes directions.The market is usually bullish but the demand does not exceed the supply of shares enough for the prices to increase. There are usually hard sell-offs but not enough to make the market trend downward.
During the distribution stage each buying order gets immediately matched with a selling order, i.e. there’s an equal power distribution between buyers and sellers. The bullish market sentiment that pushed prices higher during the mark-up stage starts to vanish and turns neutral. Technical traders can identify a distribution phase by the formation of classic reversal patterns, such as head and shoulders patterns, double tops, and triple tops. This is a great time to sell in the market, as prices reached new record-highs and valuations are at their extreme.
Fundamental investors usually stay at the sidelines and avoid to add to their long positions, waiting for a deterioration in economic fundamentals to take profits and sell their holdings. At the end of the distribution stage, economic news starts to come in lower than expected and market sentiment begins to turn bearish.
How to Trade:
There is a lot of volatility in the early stages as investors begin to pull out of the market which presents a good shorting opportunity as the market reaches the bottom it will bounce back with velocity. The distribution phase is identified through certain chart patterns like the head-and-shoulders top or bottom top. As the phase progresses the market starts to lose its volatility as a range begins to form. This is not the best situation for momentum traders.
4. Decline or Run-down Phase
As market sentiment becomes increasingly bearish, investors start to sell their holdings and lock profits that increase selling pressure in the market. Other market participants quickly follow, sending prices lower and creating a downtrend in the market. Being the last period, it also marks the beginning of the next accumulation phase, wherein new investors will purchase the depreciated investments. While prices start to form fresh lower lows and lower highs, some market participants who have bought at the peak of the mark-up or distribution stage still hold to their holdings, hoping prices will continue to rise.
Unfortunately, prices keep falling on deteriorating economic fundamentals and high selling pressure, pushing stock valuations down and providing a buying opportunity for investors who’ve been able to identify the end of the downtrend. At this point, the accumulation stage begins to form and a new market cycle starts over again.
How to trade
During this phase prices of stocks fall lower than expected so ‘don’t try to catch the falling knife’. A bear market provides a good opportunity for long trades if the right strategies are used. It is important not to panic and sell during this period because these phases don’t last forever.