The 4 Stages Every Stock And Market Goes Through
The saying that history repeats itself is true especially in the stock market.
Nothing is new in the stock market and they keep on repeating themselves again and again. That is why traders who study past patterns laboriously tend to be able to make quite a lot of profits. Today, I won't be talking about chart patterns. But I'm gonna talk about the 4 stages that every market, every stock and every index goes through.
If you have not known this, this will be a big eye opener to you. The 4 stages that every market goes through are:
Nothing is new in the stock market and they keep on repeating themselves again and again. That is why traders who study past patterns laboriously tend to be able to make quite a lot of profits. Today, I won't be talking about chart patterns. But I'm gonna talk about the 4 stages that every market, every stock and every index goes through.
If you have not known this, this will be a big eye opener to you. The 4 stages that every market goes through are:
- Stage 1 - Basing
- Stage 2 - Bull Phase of Uptrend
- Stage 3 - Topping Stage
- Stage 4 - Bear Phase / Crash or Downtrend
After you have gone through this lesson, please look at all the stock charts and index charts. You will realize that all markets and stocks and indexes go through this cycle again and again.
Stage 1 -Basing or Market Bottom
Stage 1 is where the market is basing. When a market is basing, it usually does not move that much. It kind of consolidates and trades in a tight range. In this stage, there is nothing much to do and the market or stock does not provide much movement that gives the trader a chance to profit.
Stage 1 is also where the index or stock is finding a bottom.
Sometimes, the bottoming process will take a long time. The bottoming process might be in the form of a tight consolidation or it may take the form of a whippy movement. Sometimes in the form of what many analyst on the financial networks say a V bottom. You can see a V bottom in 2009 in the chart of SPX above. A more orderly basing but still whippy basing is in 2003. While a tight consolidation kind of basing can be seen in 1994-1995.
Many traders like the whippy basing or the V type of basing because of its volatility and it gives a talented trader an opportunity to make money fast. In order to make money from tight basing, a trader has to wait for a breakout. Which brings us to the next Stage.
Stage 1 is also where the index or stock is finding a bottom.
Sometimes, the bottoming process will take a long time. The bottoming process might be in the form of a tight consolidation or it may take the form of a whippy movement. Sometimes in the form of what many analyst on the financial networks say a V bottom. You can see a V bottom in 2009 in the chart of SPX above. A more orderly basing but still whippy basing is in 2003. While a tight consolidation kind of basing can be seen in 1994-1995.
Many traders like the whippy basing or the V type of basing because of its volatility and it gives a talented trader an opportunity to make money fast. In order to make money from tight basing, a trader has to wait for a breakout. Which brings us to the next Stage.
Stage 2 - Bull Market or Uptrend
Stage 2 is where the most action and excitement is seen.
It is after all a Bull Market. This is where you hear stories of young kids out of college making huge amount of money and buying fancy cars. This is also where a lot of people become reckless with their finances and keep on buying stocks and risking lots.
But,
This is the BEST time to make money in the markets. You can be quite sloppy and still make money during the bull phase. When a stock or market is sloping upwards in a 45 degree angle, the stock is in Stage 2. In Stage 2 you look for dips and continuation pattern to enter a stock.
It is after all a Bull Market. This is where you hear stories of young kids out of college making huge amount of money and buying fancy cars. This is also where a lot of people become reckless with their finances and keep on buying stocks and risking lots.
But,
This is the BEST time to make money in the markets. You can be quite sloppy and still make money during the bull phase. When a stock or market is sloping upwards in a 45 degree angle, the stock is in Stage 2. In Stage 2 you look for dips and continuation pattern to enter a stock.
There are 2 ways to make money in a stock that is in a Stage 2 or uptrend.
Another way to determine whether a stock is in a Stage 2 is to see if it is above its rising 20 and 50 MA. The moving averages can point out easily whether the stock is in an uptrend or downtrend.
- You buy the BREAKOUTS
- or you buy the DIPS
Another way to determine whether a stock is in a Stage 2 is to see if it is above its rising 20 and 50 MA. The moving averages can point out easily whether the stock is in an uptrend or downtrend.
Stage 3 - Topping Stage
Stage 3 is where the stock market or the stock tops.
In this stage the stock can move in a wide and whippy fashion. At other times, the stock can suddenly gap down and drop drastically forming a V shape top. This is the stage where a lot of people get caught because of their greed. The market has been rising for some time and many people do not want to get left out of the bullish action. So they throw in their money only to see their stock fall the next day.
This is definitely not a time for you to be buying stocks.
In this stage the stock can move in a wide and whippy fashion. At other times, the stock can suddenly gap down and drop drastically forming a V shape top. This is the stage where a lot of people get caught because of their greed. The market has been rising for some time and many people do not want to get left out of the bullish action. So they throw in their money only to see their stock fall the next day.
This is definitely not a time for you to be buying stocks.
Stage 4 - Bear Market Phase or Downtrend
In this stage, the stock or market experiences a bear market.
When a stock is in Stage 4 you stay away from the stock. You do not want to be buying this stock. It is very easy to spot a Stage 4 stock since the stock will be making a -45 degree angle. It will be below its 20 and 50 MA. You stay away from a stock that is in a downtrend or you can learn how to short stocks and profit from the decline.
When a stock is in Stage 4 you stay away from the stock. You do not want to be buying this stock. It is very easy to spot a Stage 4 stock since the stock will be making a -45 degree angle. It will be below its 20 and 50 MA. You stay away from a stock that is in a downtrend or you can learn how to short stocks and profit from the decline.
What To Do In Each Stage Of The Market
Now that you have learned about the 4 stages that the market goes through, you need to know what you should do in each stage. Its pretty obvious actually.
- In Stage 1 where the market is basing, do nothing
- In Stage 2 where the market is rising, look for bullish trading strategies
- In Stage 3 where the market is topping, do nothing
- In Stage 4, the beginning of a bear market, stay away or learn to short stocks
How many did you get correct?
You got all of them correct : )
You are an expert now : ) J.K.
You are an expert now : ) J.K.
The 4 Stages Appear In Every Market Including Stocks, Commodities, Forex
As I said, all markets go through the 4 market stages. No matter what stock or market, they will always go through the 4 market stages in one time frame or another. This is very useful to fund managers and investors who invest for the long term. It does not happen immediately but every day and every week, the market is slowly changing from stages to stages. Smart investors and traders can take advantage of this knowledge and plan their trading and investing strategies properly.
The 4 Market Stages Appear In Every Time Frame
One of the surprising things about market stages is that it also applies to all time frames. You can see a stock make a stage 1 to stage 4 cycle in a 5 min chart, a 15 min chart, a 30 min chart, a 60 min chart, a daily chart, weekly chart, monthly etc. The 2 charts below show how QQQ made a cycle in the 5 minute chart as well as the 60 min chart.
With this knowledge in mind, the next time you are buying or shorting a stock ask yourself...
What stage is my stock or market at currently in the timeframe that I have chosen? If this lesson have opened up a whole new dimension to you, please share this article to everyone whom you think might benefit from this knowledge.
What stage is my stock or market at currently in the timeframe that I have chosen? If this lesson have opened up a whole new dimension to you, please share this article to everyone whom you think might benefit from this knowledge.