Before you can start to trade you have to know in which stages a stock can be in. The stages tell you what to do when trading. Going short, long, or just stand aside in cash.
TIP: When you want to determine the stage a stock is in, please choose a weekly time frame for the stock chart you want to analyze and display the MA30 (30 week Moving Average).
Stage 1: Basing
This stage is formed after a prolonged decline. The stock starts to move sideways and is forming a base. The sellers that were once in control are losing their grip and the buyers are showing up. This stage can be long, and when you get stuck in it, your money will be tied up for a long while. So at this point, keep your cash aside.
You can recognize this stage when the MA30 on a weekly chart is flat and the stock is trading sideways after a prolonged downtrend.
Stage 2: Advancing
After a long wait, and having your money tied up what feels like ages, finally stage 2 arrives and the uptrend starts. The pros pile up a lot of the stock before the masses get in. Since most – amateurs- have forgotten about this beaten down stock they start buying when the price advanced far too much and that is when we get in the next stage. You should better be long in this stage.
You can recognize this stage when the prices cross over the MA30 on a weekly chart and the stock is starting to get in an uptrend.
Stage 3: Topping
This stage is a bit similar to stage 1, except stage 3 is the stage following after an uptrend (and not a downtrend). The stock starts to move sideways and buyers and sellers are equal. The pros already unloaded there stocks or are still unloading.
Stand aside when you see a stock getting in this stage.
You can recognize this stage when the MA30 on a weekly chart is flat and the stock is trading sideways after a prolonged uptrend.
Stage 4: Declining
Yes it is over, the stock is going down. Sometimes there is a retest to the price level were the stock went down, but after that it is goodbye, and for the traders getting in a bit late, it is bye bye to your hard earned cash. After this it is back to stage 1.
When you trade, please consider going short.
You can recognize this stage when the prices dip under the MA30 on a weekly chart and the stock is starting to get in a downtrend.
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