In order to know how stocks work and why they go up and down, you have to study the stages in the stock. This article will guide you on how to understand stocks and how they move. Stock market stages are one of the most important fundamentals that you should learn when starting out as a trader. With this knowledge you will be able to position yourself on the right side of the market or on the right side of the stock.
In order to fully understand the movement of stocks, traders need to know that stocks generally go through 4 periods or stages. They are:
Just like the life cycle of a product or the life of a business, stocks can also be categorized into different periods. Once you understand each stage, you will be able to understand why stock prices move the way they do.
The basing stage is the hibernation stage that stock prices go through. Usually there will be not much movement in the stock. There will be bounces here and there but overall there is lack of activity in the stock. Nobody really pays attention to this stock.
In this stage, it is best not to touch the stock because of opportunity cost. When you place your money into a stock that is basing it can be stuck in the stock for a long time.
During this period, the stock will have a lot of activity. The stock will be moving up making higher lows and higher highs. This is the period where there is a lot of growth in the stock. Just like when a company is growing, the stock price will be growing. Some stocks can shoot up very fast while some stocks will be grinding up slowly.
It does not really matter how fast or slow the price rises. All you need to see is whether the price is moving up steadily. Since this is the best period of price advancement, the trader will make the most money during this period.
A company does not grow forever. Therefore there will be a period where the price of the stock will top out. During this period, the stock price will move erratically. Some will move up sharply and then decline just as fast when the bubble pops. Stocks usually gives us a sign that they are topping.
They usually move too fast too soon and then collapse or they can be slowly forming a topping pattern. You will be able to spot this when you see prices refusing to go any higher. Every time the price tries to go up, sellers will come in and push the stock lower.
During this period, it is best to avoid the stock because you do not know when it will crash.
Just like many companies that no longer exist, there will come a time when the price of the stock will decline. This usually happens when the company starts to get beaten down by competitors. Or the management is unable to keep up with times and produce good earnings for the company.
That is when investors will start to sell the stock. Because there are not many buyers who are interested in the stock, the stock will decline steadily.
This is also a time that investors and traders should stay away from buying the stock.
The above 4 periods is just an example of what a stock will go through in a given time frame. The cycle can repeat itself in longer term charts such as the weekly chart or it can repeat itself even in smaller time frame charts such as the 5 min chart. It is important for the trader or newbie to understand what he or she should do in each period.
To be able to spot the different periods of a stock, we use charts to aid us. The above is the chart of AAL and you can see how the stock moved through the 4 periods. If you had known this knowledge, you will understand how stock works and be able to take the correct action in each period.
Hope this article gives you an greater insight and helped you on how to understand stocks. Do take the opportunity to start the Stock Market Course and learn more about how stock works.
Charts with the Freestockcharts.com label are courtesy of Freestockcharts.com
Charts with the investing.com logo are courtesy of Investing.com powered by Trading View
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