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“My strategy aims to help you pull one winner out of the market each week, regardless of market conditions!” – Jeff Bishop


Have you ever traded a strategy during the summer…just to watch it fail during the winter?

Or

Have you ever made money one month… then give it all back the next?

It’s enough to drive a trader mad.

So what’s going on here?

It’s actually quite simple.  The markets are always changing.

And as a trader, it’s your job to adapt to new market environments to stay competitive and make money.

This means…if you are using a trend trading strategy, then you’ll lose money in a range-bound market.

And… if you are using a range-bound trading strategy, then you’ll lose money in trending markets.

So what’s the solution?

As a trader, you need to be able to identify the key stages of the markets in order to stay ahead of the next pattern.

In this post, you’ll learn exactly just that and how to make them work for you!

 

The 4 Stages of the Markets

 

In this post you’ll learn:

  • Stage 1: Accumulation
  • Stage 2: Advancing
  • Stage 3: Distribution
  • Stage 4: Declining

 

Stage 1: Accumulation Phase

 

The accumulation phase is the stage where trend traders get killed.

Many traders try to pick bottoms and trade false trend continuations lower here.

 

Characteristics of accumulation phase:

 

  • It occurs usually after prices have fallen over an extended period of time. (6+ months)
  • Can last anywhere from months to years
  • Looks like a long period of consolidation occurring during a downtrend
  • 200-day moving average is flat
  • Price whips back and forth around the 200-day moving average
  • Volume is lower due to lack of interest

Accumulation looks something like this:

 

 

What are the best strategies to use and ones to avoid during the phase?

 

A good approach to take in an accumulation phase is to trade the range itself.

This means that you would look to go long at or near the lows of the range, and short at or near the highs of the range.

Here’s what I mean…

 

Source: www.tradingview.com

 

And since you are in a range-bound market during this phase, it is best to stick with range trading strategies.

 

Trades to avoid taking during an accumulation phase:

 

In an accumulation phase, the markets are “wandering sideways” and it’s best to focus on key areas instead of guessing.

So… this means it’s best to avoid 2 types of trading strategies.

They are:

  1. Avoid trading the middle of the range as you don’t know which way the stock can swing.
  2. Avoid anticipating a trend as it’s highly likely to be a bear or bull trap inside the range.

 

Stage 2: Advancing Phase

 

After a price breakout and confirmation, it is off to the races for the stock.

If the stock heads into an advancing phase (an uptrend) it is more likely to continue making higher highs and lows.

This is a trend traders best setup and one they love to get long for the uptrend.

 

Characteristics of advancing phase:

 

  • Occurs after a price breaks out of accumulation phase
  • Last months to years
  • Continues to make higher highs and higher lows
  • Price trends higher
  • Most days are positive
  • Short term moving averages are above the long term moving averages
  • 200-day moving average points higher

Advancing phase looks something similar to this:

 

 

What is the best strategy to use?

 

In an advancing phase, you want to make sure you are trading a trend trading strategy to capture the major trends in this market environment.

The two common trend trading strategies are:

1) Trade the pullbacks

 

 

As a pullback trend trader, you would wait for every pullback near the major moving averages to get into a long position at.

Other tools to trade a pullback are:

  • Moving averages
  • Support and resistance
  • Fibonacci levels

2) Trade the breakouts

 

 

As a breakout trader, it’s best to wait for levels at which price is looking to head higher and get in once it’s broken out.

 

Stage 3: Distribution phase

 

The distribution phase is where trend traders get hurt again.

This phase usually occurs after a rise in prices and looks like a consolidation period at the top of a long uptrend.

 

Characteristics of a distribution phase:

 

  • Occurs when prices have risen the last 6 months or more
  • Can last anywhere from months to years
  • Can look like a period of consolidation during uptrend
  • Price trades within a range
  • 200-day moving average is flat
  • Price whips back and forth around the 200-day moving average
  • Volume is lower due to lack of interest

Here’s what I mean:

 

 

What is the best trading strategy to use?

 

Similar to an accumulation phase, a good approach to trade in a distribution phase is the range.

This means going long at the lows of the range and going short at the highs of the range.

Here’s what I mean…

 

 

With the range clearly defined it’s easy to trade long and short in the range-bound markets.

And like the accumulation phase, there are 2 trading strategies to avoid during this phase

 

Trades to avoid taking during a distribution phase:

 

In a distribution phase, the markets are “wandering sideways” and it’s best to focus on key areas instead of guessing.

So… this means it’s best to avoid 2 types of trading strategies.

They are:

  1. Avoid trading the middle of the range as you don’t know which way the stock can swing.
  2. Avoid anticipating a trend as it’s highly likely to be a bear or bull trap inside the range.

 

Stage 4:  Declining phase

 

This is the phase where traders end up holding their positions too long.

This phase is notorious for turning amateur retail traders into long-term investors…and doing so quickly.

After the price breaks down out of the distribution phase, it goes into a declining phase ( a downtrend ) and consists of lower highs and lows.

This stage is where traders who do not cut their losses quickly become long-term holders of a stock.

 

Characteristics of declining phase:

 

  • Occurs after price breaks out of distribution
  • Can last months to years
  • Price forms lower highs and lower lows
  • Price is trading lower
  • Most days are down or negative
  • Short term moving averages below long term moving averages
  • 200-day moving average is pointing lower

A declining phase looks something like this…

 

 

What is the best strategy to use?

 

In a declining phase, you want to make sure you are trading a trend trading strategy to capture the major trends in this market environment.

The two common trend trading strategies are:

1) Trade the pullbacks

 

 

As a pullback trend trader, you would wait for every pullback near the major moving averages to get into a short position at.

Other tools to trade a pullback are:

  • Moving averages
  • Support and resistance
  • Fibonacci levels

2) Trade the breakouts

 

 

As a breakout trader, it’s best to wait for levels at which price is looking to head lower and get in short once it’s broken out of the key levels.

 

Trades to avoid taking during a declining phase:

 

When price is in a downtrend, the last thing you want to do is go long against the trend without some seriously strong arguments why exactly price will turn around.

Otherwise, you’ll just be catching a falling knife.

Now… I’m not saying that reversal trading is wrong, but the path of least resistance is clearly to the downside.

By trading the trend, you’ll get a bigger bang for your buck as the direction move is stronger than the correction move.

 

Wrapping up

 

So in this article, you learned what the 4 stages of a stock price are.

To recap, the 4 stages are:

  • Accumulation
  • Advancing
  • Distribution
  • Declining

Each stage has a very rewarding opportunity that is available to the trader, only if identified correctly.

These are the key points for every stage to keep notes of in your trading journal to help identify the market conditions you may see.

Stage 1: Accumulation

  • There is no trend, so it is best to trade range-bound strategies only at this stage
  • Can lasts months or even years, do not anticipate a reversal…wait for confirmation from advancing stage
  • Don’t confuse this stage with a long period of consolidation during a downtrend

 

Stage 2: Advancing

  • There is no sideways price action, so it is best to trade trend-following strategies only at this stage
  • Occurs after a price breaks out of accumulation phase
  • Last months to years and price continues to make higher highs and higher lows
  • Going against the trend is like stepping in front of a train.

 

Stage 3: Distribution

  • There is no trend, so it is best to trade range-bound strategies only at this stage
  • Can lasts months or even years, do not anticipate a reversal…wait for confirmation from declining stage
  • Don’t confuse this stage with a long period of consolidation during a uptrend

 

Stage 4: Declining

  • There is no sideways price action, so it is best to trade trend-following strategies only at this stage
  • Occurs after a price breaks out of distribution phase
  • Last months to years and price continues to make lower highs and lower lows
  • Going against the trend is like catching a falling knife.

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