Amarket cycle is the duration of events, either short or long term, involving changes in stock market patterns, which are in turn caused by changes in related business cycles. It is a period between market events and can be different according to the entity involved. This period can last from a few minutes to several years according to the analysis being conducted. Each business enterprise will respond differently to a particular market cycle.
An understanding of the stock market cycle will help you plan for better entries and exits. It is important for investors and swing traders who plan to hold a stock for a period longer than one day, but can also apply to other traders. An understanding of the phase a stock is currently in is important in order to predict what phase it will go next. This article will explain to you the four phases of the stock market cycle.
Phase 1: Accumulation
This is the first phase of the cycle after a markdown phase and before the markup. It can apply to any investment firm, individual investor or the whole market. It is in this phase that shares trend at face values with rare fluctuations in the price, and thus encourages traders and small investors to accumulate them by buying in batches or one go. There are institutional buyers who buy the stocks in phases to avoid making te cost of the stocks high thereby losing the chance of buying at a lower price.
Phase 2: Markup
This second stage involves the period where the price of stocks starts to continuously grow higher. These prices are longer in control like in the accumulation phase. It is in this phase that investors earn their profits. They should however, not stay too long before they sell their shares, as the duration of this period is unpredictable. Waiting for too long may see you earning a loss. For seasonal investors, this period is very fruitful as decrease in prices can be accounted for by buying more shares.
Phase 3: Distribution
In this phase, the prices of the shares are stagnant. The shares that investors bought are now being sold off. This is not a good time for individual small investors as the market is uncertain and most of the investors are exiting the market. The cycle is headed towards the markdown phase.
Phase 4: Markdown
This is the last phase in the cycle and most retailers and institutional retailers a void this phase. This phase entails reduced demand in the stocks and hence low prices of the stocks. Most retailers try to come out of the market at this time and save their investments. You should ensure you get out of the market before the onset of this phase due to its volatility.
How to Apply this Information
The main thing is to turn this theoretical information into actionable strategies. An understanding of the stock market cycle is very important in analyzing the stocks chart. This analysis helps you find the favorable price points which will earn you profits. You should aim at a point where the price points of a stock transitions from one phase to another. Finding a point of transition from accumulation to markup stage provides a long opportunity while a point of transition from distribution to markdown stage provides a short opportunity.
It is important to plan the trades ahead of time as this helps you get better entries into the market and exits. For instance, you may decide to set an alert in your trading software in case a stocks breaks above of its trading resistance level. This will allow you to enter the market exactly at the start of the breakout. The most important thing of understanding the stock market cycle is providing you with clarity and increasing your awareness of the market.
Savanis