4 market stages you should know to understand price action

4 market stagesThe prices of the underlying financial instruments are in constant motion. Markets can change in a second and sometimes it may seem a difficult task to look at the bigger picture. Even during the uptrend the price sometimes goes down and in the downtrend, there are some upwards movements. Being able to read price action is important for traders. And in fact, we can distinguish some stages that markets take in their courses.

Stages of the markets

Markets tend to behave in a certain way. Of course, they can change unpredictably, however, there are 4 main stages they take. These are the accumulation stage, the advancing stage, the distribution and the declining phase. Let’s talk about them one by one.

The accumulation stage

This phase is taking place after a long fall in the price. When you look at a daily timeframe, this fall can last more than 5 months. The price chart reminds ranging market in a downtrend. You can mark support and resistance levels at this stage. When you add the moving average with the period of 200 it will flatten out and the price will fluctuate around it. The accumulation stage ends at the moment the price breaks out the resistance.

You can see how the EURCHF market looks like in the accumulation stage in our example below.

Accumulation phase on EURCHF
Accumulation phase on EURCHF

The advancing stage

So the price has broken out through the resistance line. You can observe higher highs and higher lows on the price chart. The MA200 moves up and the candlesticks appear above it.

This stage finishes when the uptrend gets exhausted and then, the market moves to the next phase.

Advancing phase
Advancing phase

The distribution stage

This phase is taking place after a long (5 months or more on a daily timeframe) rise in the price. The market resembles the ranging market in the uptrend. You should be able to draw the support and resistance lines. The moving average is again flattening out and the price moves around it.

The bulls and bears are still fighting. When the support is broken, the distribution phase comes to an end.

Distribution phase
Distribution phase

The declining stage

The fourth phase happens after the price crosses through the support level. The price plots beneath the 200-day moving average which begins to decline. During the declining stage, the price forms lower highs and lower lows. The market moves downwards.

Declining phase
Declining phase

The importance of 4 market stages

Although the price changes constantly, we are able to recognise 4 market stages. It is important for traders to learn to detect them as they indicate what positions traders should open.

In the advancing stage, you should look for opportunities to open transactions for the price increase. You can trade breakouts or pullbacks. And in the declining stage, you will want to enter short trades.

You are now aware of the fact that the distribution stage finishes when the price breaks through the support. That is why you should wait to go short at that precise moment or when the price pulls back after the breakout happens. Similarly, during the accumulation stage, you will seek the opportunity to buy when the price breaks through the resistance or later on the pullbacks.

Knowing what stage the market is in helps you to make trading decisions. You will be able to apply a proper price action strategy and earn some profits.

Remember about the Olymp Trade demo account where you can practice recognising and trading during different market stages. This account is offered completely for free and provides a risk-free environment. So go there now and check whether you are able to recognise the 4 stages of the market explained in today’s article.

Wish you success!

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Bart Bregman

Full time day trading, and helping out with Olymp Trade wiki in my spare time to create an awesome platform for beginners. I'm a digital nomad that travels the world while working from everywhere!

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