Stock trading and stock market stages
Beginner Stock Market Investing, Stock Market Investing Strategies, Stock Trading
While trading stocks, have you ever grappled with the problem of determining when you should go long, when you should go short and when you should sit on the sidelines in cash? Every trader faces these problems on a continuous basis and in order to trade successfully and profitably, you should understand the stages that every stock as well as the overall stock market passes through. Once you are in a position to identify these stages, you can adopt the appropriate trading strategy. In fact, after a learning period, you shouldn’t even have to think about it. You can focus on your strategy just by looking at the right charts.
The stages that both stocks and the stock market go through are the same in all of the time frames and it doesn’t matter whether you are using monthly, weekly or daily charts. People tend to overcomplicate analysis and get into a paralysis by analysis mode when they should be simplifying data analysis so that they can concentrate on what is truly important. Too many complications can also lead you to miss the wood for the trees.
The first stage happens just after a prolonged downtrend in the stock or the market. The stock has been steadily declining but now the decline has been stemmed and it is beginning to trade sideways indicating that a base or a support level has been reached. The sellers who have been causing the decline are beginning to run out of steam as buyers become more aggressive. The sideways trading continues without establishing a firm trend and investors are wondering whether to buy or to sell or simply to wait and watch. At this stage, the best thing for you to do is to be in cash and stay away.
In the second stage, the stock breaks away and an uptrend is established. This is where you can find the maximum returns from a stock because, paradoxically, many investors do not have the faith in the rally to act upon it. They still hate the stock and have any number of reasons for doing so such as unimpressive fundamentals or a negative outlook. At this stage, canny investors are actually buying up stock which they will unload on investors who come late to the party. You should be concentrating on aggressively building up long positions
At the third stage, the stock would have topped out and again begins to trade sideways. Newcomers to the party are just entering the stock and, with buyers and sellers in a state of equilibrium, the stock price just drifts along. At this stage, you should have sold your stock and you should be in cash again.
At the final stage, the dreaded downturn begins and investors in long positions are in trouble. Once again, many investors do not believe that the party is over and regard the downtrend as a temporary correction. They just hang on to their stocks hoping desperately that the stock will move up again. This is a time for you to reenter the market and to build up short positions aggressively. When the downtrend is established, you will be laughing all the way to the bank.
Tags: Beginner Stock Market Investing, Investing, investing in the stock market, Stock Market, stock market for beginners, Stock Market Investing, stock trading