Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

Phase of the Stock Markets and Volume Analysis

2 min read

Source :Internet

 
I hope the image describes itself.I like to have some discussion on phase of a stock. Stocks go through phase. And we must understand in which phase the stock is in to enter in disciplined way.

You might see a strange thing in the image below.That is the stock below is moving in a calculative manner. If we research,we will see that there are several strategy that can be applied to this stock for entry.

One could enter at first phase,which is recovery phase. Recovery phase is the most profitable phase of a stock. In this phase,the stock stops its fall and just move sideways.There will be flat base type pattern in this phase. The volume may not be heavy.Just some spike of volume can be seen here..But the problem is we really don’t feel like entering a stock at that phase. It is difficult to enter a stock when it is not moving up.But interestingly,big investors start to enter in this phase.This is their accumulation phase. Only big investors have strength to do that,as they have news in advance.They know that the stock is going to go up soon.

Then,the stock starts to move up,which is the starting of second phase.Some small traders(especially the experienced,risk takers,informed ones) enter into beginning of the second phase when the stock has just started to move up.These are reversal traders.Some enters into the middle of the move and just get out soon. These are momentum traders. Both of these groups are skilled traders. These are profit takers,and low in quantity in the market.

But problem occurs with the top,where new traders,inexperienced ones,uninformed ones start to enter. They are late. And they enter just at the top. Because already the stock is in fire,everybody talks about it.There is rumor in the market spread by other traders.So,all want to jump in it. The sentiment rises,and with that the price and volume rise heavily. Now getting a chance to have some lucrative profit,those investors and small traders that entered before everyone start to offload their holdings pushing the price down. This is euphoria or blow out phase. This is a bad entry.We should always try to avoid this phase.

Then comes the pullback.Big traders already sold much of their holding to small traders at the euphoria phase.Now there is no manipulation by big traders.They are not holding the stock.The supply is high.Small traders hold on to their stock in lose.Some panic,and start to sell. Now if the selling is hard at this level,then the stock will go to reversal. But if the selling is not hard enough,or the stock is still in demand,the stock will go to pullback only. This is another entry point.

Now there will be another entry point in the stock after the pullback.And technically that would be the last entry in this stock!!!!!! However,sometimes the stock may have several breakout and pullback. See Bracbank’s one year trading.

If you go through the data/charts of all stocks,you may find stocks usually go through such phases. And whether a stock will go to pullback or reversal situation,none can say unless there is indication of it.

Now think why huge volume at the top is bad indication. Because a lot of transaction is occuring. And usually,big traders are selling to the small traders there.And usually,after tht euphoria phase,stocks lose momentum.

Now why should we know where the stock is in at the moment! Because we need to be disciplined..

Now how do we enter the stocks. We develop some criteria to enter the stock at each phase. We will work on each phase and find the best possible entry.

Now if we have some pre defined entry strategy or patterns,we will have some advantage over the market. And one of them is discipline.Because then,we will know what we will do under certain situations.

Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

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