The 4 Stages of the Market - Entry and Exit Points

Updated: 2 days ago


Have you ever felt the stock price falls when you buy? And the price reverses its current direction and goes to heaven as soon as you sell? I've experienced the same. When I started investment, I got a 25% return in two months, but that was not always the case. Later on, my judgments were primarily wrong, and I don't know why! This was until I read a book that enlightened and helped me cover my lack of knowledge.


I would start by giving you a basic but crucial piece of information, i.e., don't buy or sell without knowing the market's current phase or stage. Most beginners get carried away with price action and indicators and do not take the market's current phase into account, and worrying why their trades fail. To be near accurate, one has to use different approaches for different stages of the market.

A butterfly undergoes different stages of development. From being just a worm to a mature butterfly, it goes through phases. Similarly, if you think of the market as a life thriving, you would understand it has to go through some phases to be complete.


It's mandatory for a trader to know which stage the market is currently moving to, but it is more than necessary for an investor to know its phase. Because you don't want to invest a large amount of money while the market is about to reverse its direction bearish, so let's talk about the four stages of the market and a brief account of the entry and exit points for a retail investor.

The four phases of the market are:

  1. Accumulation

  2. Up-trend

  3. Distribution

  4. Reversal (down-trend)


ACCUMULATION:

This is the initial stage of the market where institutions invest in a spread time. Institutions cannot buy all the shares in a short time period because it will lead to a sharp price hike. Other players would exit their position for profit booking, which will put them in a difficult place. This stage can also be recognized as the trading zone.


(The index is in the accumulation stage where no signs of trend or trend reversal are shown. It is mostly the price bouncing in & off inside a range)

Don't get misled by its name. It is generally safe to avoid this zone because the price would be in a compressed position which will have whipsaw movements. Scalpers can play at this specific time. But retail investors can wait until the next stage of the marker.


Up Trend:

Bullish market and mark-up phase are its other names. This is where retail investors can enter with lesser risk. Because there will be new higher highs and higher lows. So, anytime you enter the market is most likely to go up until the next phase.


(The index is making new higher highs and higher lows. The previous highs are repeatedly broken, and previous lows remain un-breached)

Before this stage, institutions try to manipulate the market so that the market can move in a consistent manner. This might be a significant problem for newbies and can result in potential loss. If you can identify the higher highs and higher lows, jump in if other technical parameters agree with that.


Distribution:

This is the end of the trend, or you can say it's the exit point for an investor. The market would no longer make any higher highs or higher lows. The bull trend of the market is stopped and entered into this phase because institutions have made up their mind and started taking profits. Their exits affect the momentum of the uptrend, thus leaving the market sideways. This phase will be similar to the accumulation phase but not as long.


(The uptrend has finally come to an end; institutions and investors have been booking profits and exiting their positions which will lead to a reversal in the trend)


Novice retailers think of this as a chance to jump into the moving train. But little do they know that the market is going to reverse its direction soon. Popular reversal formations can be seen in this stage. Again, the institution won't sell off in a single day because it will make the stock fall into pits from which it can never rise.


Down Trend:

The last stage of a market is most likely to happen after the distribution stage but not as strong as the bullish trend. It will have new lower highs and lower lows (for your recognition). There will be a reversal in the direction of the market because of huge profit booking and traders taking short positions.


(After the distribution phase, the price starts falling until it hits all-time support and gives a bounce back)


Imagine those who've invested huge money in the distribution phase only to lose money. In some stock exchanges, you can have short positions for over a month. But some stock exchanges don't allow it. Let's leave this phase until it has reached its bottom or it started to accumulate.


Now you know the four stages of the market, how to find them, and entry and exit points. Try to back-test what you have learned today. It is best practice to test it before you apply. Minor trends and retracements occur in some stages of the market, which we have not explained. But for long-term investors, there will be no need to take them into consideration.


Patience is the key!


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