Many would argue that the market cannot be timed. We would disagree.
If markets cannot be timed, how are some traders and investors able to make consistent profits? Any consistency in trading or investing is more than coincidence in our opinion.
While many will disagree with the idea of market timing, the fact is that certain market cycles and even certain chart patterns and market behavior can be predictive in nature. Are they right all the time? No, of course not. If it were that easy, we’d all be driving Ferraris on our way to the golf course.
Understanding market cycles can be an important piece to the investing and trading puzzle. According to renowned stock market authority Richard Wyckoff, the market has four distinct phases during the course of a trend. Understanding these phases and possessing the ability to identify them may potentially allow traders and investors to time trade entries and exits with better precision.
According to Wyckoff, the four phases are:
Accumulation
Markup
Distribution
Decline
The accumulation phase involves buying of securities that have seen price declines. In other words, this is the phase in which buyers take control of the market from sellers.
The markup phase is when a stock is trending higher as demand keeps prices on the rise. This bullish phase may see investors buying on any dips as well as buying additional strength.
The distribution phase is when the market runs out of gas following price appreciation. At this stage, the sellers are retaking control of the market from the buyers.
The decline phase is the phase in which the stock is trending lower as prices decline. Rallies are likely sold into, and further weakness is also sold.
Identifying the Phases
As a trader or investor, you always want to choose the path of least resistance. By identifying the markup phase, you can look to enter long positions on pullbacks or upside breakouts and try to ride the potential wave higher in price.
On the other hand, the ability to identify the distribution and decline phases may potentially help the trader or investor exit long positions and even potentially look to enter short positions. During the decline phase, one may potentially look to sell any rallies or sell on further downside price movement such as fresh lows.
While understanding and identifying these market phases may not help one buy the low or sell the high, they can potentially put the trader or investor in a position to capitalize on a significant portion of extended appreciation or declines.
