FOOD FOR THOUGHT ... 4 Stages of Price Movement ..........
I recall reading somewhere that 70% of a stock's upward price movement develops in a 30% time frame. This price breakout is often referred to as a Stage 2 price movement.
The purpose behind technical analysis is to help us define when a stock is moving from a Stage 1 base into a Stage 2 breakout.
All stocks go through the various 4 stages of price movement and it's important to know how to define each stage so we can become more successful with our trading.
There are 4 stages to a stock price's movement.
Stage 1 is the Basing Area.
This is where a stock has actually been falling and comes into an area where it trades sideways for a while. It is during this stage that your moving averages stop falling and start to level out. A good basing period is 7 weeks or more. Breakouts on less than 7 weeks of basing are often false breakouts. Not always, but often.
Stage 2 is the Advancing Stage.
This is the stage where where the price starts advancing, the volume picks up and the moving averages start rising. This is the stage that captures most of the price movement.
Stage 3 is the Top Area.
This is where the upward movement peters out and the stock starts trading sideways again, or starts to show sharp and choppy movement. This stage is where the battle between buyers and sellers heats up again as both bulls and bears try to gain or maintain control. The moving averages will once again start leveling out. It is possible another Stage 2 can develop here but, if not Stage 4 comes into play.
Stage 4 is the Declining Phase.
This is where the price starts falling. It's mostly the opposite of Stage 2 with the exception of volume. Stage 2 requires increasing volume to push prices higher, prices will often fall on lower volume. In this phase, your moving averages will all be falling.
All of this is covered in the book, Secrets For Profiting in Bull and Bear Markets by Stan Weinstein. A "MUST READ" in my opinion by anyone serious about obtaining consistent profits.
HOW TO IDENTIFY AND ENTER A STAGE 2 STOCK:
In looking to identify stocks transitioning froma Stage 1 base into a Stage 2 up trend, I look for stocks breaking out of the base with a high volume, wide range bar.
Nearly every stock that breaks out into a Stage 2 up trend has one thing in common, it had that one day where professional money showed up to help price break out.
Not all break outs are successful, but every successful break out had the high volume, wide range bar.
Let me provide some examples. (Keep in mind, Weinstein works off weekly charts to identify trends, so does Investors Business Daily and most of the Market Wizards.)
I can provide many more examples.
The point is, most Stage 2 uptrends are kicked off with a high volume, wide range bar. It's professional money that gets things going.
Most retail traders avoid break outs. They fear buying a stock breaking out to a new high. They are trained to buy cheap and thus miss very explosive price moves that occur in a short time frame.
If institutional money is behind price movement, price is going higher. Institutions buy large positions and they can't buy it all at once. The more they have to buy, the higher price is going to go.
Additionally, those who trade for a living or trade for the major financial institutions are required to show a profit every month. Go 2 months with losses and you are off the trading desk.
If you must show a profit every month, you must buy strong performing stocks. You can't afford buying a laggard and hold for the long term. Leave that to the novice traders. They won't outperform over time. They may have periods of success, but professional traders have to have success all of the time if they want to earn a living.
Trade like a pro!
Learn how to identify where the professional money is going and go with the flow. It's where the big returns are over the long run and in a shorter period of time.
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