Understand the Stock Trend Cycles when Day Trading - dummies

Understand the Stock Trend Cycles when Day Trading

Knowing the phases of a stock trend can help you better evaluate what’s happening and improve your chances of profiting from day trading. Stock price trends tend to move in cycles that can be seen on the trend line and performance indicator charts or observed in market behavior. Here is a summary of some phases of a trend:

  • Accumulation: This is the first part of the trend, where traders get excited about a security and its prospects. They start new positions or add to existing ones.

  • Main phase (also called continuation): Here, the trend moves along nicely, with no unusual price action. The highs get higher on an uptrend, and the lows get lower on a downtrend. A trader may make money — but not big money — following the trend here.

  • Consolidation (also called congestion): This phase indicates a sideways market. The security stays within the trend but without hitting higher highs or lower lows. It just stays within the trading range. A consolidation phase is good for scalpers, who make a large volume of trades in search of very small profits. It can be boring for everyone else.

  • Retracement (also called correction or pullback): Retracement is a secondary trend, a short-term pullback away from the main trend to the support level. Retracements create buying opportunities, but they can also kill day traders who are following the trend.

  • Distribution: In the distribution phase, traders don’t think that the security can go up in price any more. Hence, they tend to sell in large volume.

  • Reversal: At this point, the trend changes. It’s time to sell if you’ve been following an uptrend and buy if you’ve been following a downtrend.