Stock markets are always trading with uncertainties and unexpected movements. There are various stages in the stock market that a trader must know to keep up with their trading in the securities. 

We understand your confusion when you look at the stock markets, security price, charts and movement. Confusion happens when you are not habituated to the market swings, breakouts and breakdowns.

 We are here to reassemble the stock market movements through four stages which are known as the Stock Market Cycle.

1. Stock Market Cycle

Stock Market Cycle includes four different stages in a long-term chart developing huge importance for investing and trading purposes.

A stock has its lifecycle; through this stock market cycle, one can identify where the stock price is currently in the lifecycle. 

Like, whether includes several seasons and we accept it, traders should accept the different phases that stock goes through in its lifetime. 

 

 

 For example, after a bear phase, there will be a bull phase and vice versa. 

The four phases – accumulation phase, mark-up (run-up) phase, distribution phase and mark-down (run-down) phase are the cycle of stock market. 

Understanding how each phase works will be beneficial for you to get a good grasp of technical analysing while analysing charts during trading. 

1.1  Accumulation Phase

The first phase of the stock life cycle is the accumulation phase which is observed in the early life of a new company after it is listed in the stock markets. 

The accumulation phase is a range that has strong resistance developed at the top of the charts. The period lasts from a month to several years. It depends upon the nature of the business and the company’s performance. 

This phase does not consist of any transparent trend but aims to accumulate shares before it proceeds to break out the price. The accumulation stage always comes after a downward trend, then it accumulates at the bottom to proceed to an uptrend movement. 

During this period, the stock tries to establish and reorganize after an adverse business condition which enables the accumulation to take place at an affordable price. 

Investors enter this phase to accumulate stock to hold it for a long period and have no intention of selling anytime soon. The longer the accumulation period will sustain, the higher will be the breakout in the future or next phases. 

Trading Aspects to Remember:

• Use the time in the accumulation phase to anticipate the entry time into security, index, or funds. 

• Accumulation period is advantageous for investors more than traders. 

• Market sentiment changes from negative to neutral. 

• Breaking the accumulation phase can regenerate the price movement with a breakout. 

• It is advised to make traders in small amounts and ignore large amount trades.  

1.2  Run-Up Phase or Mark-Up Phase

Run-Up phase begins just after the accumulation phase crosses its resistance to define new and higher stock prices. 

In this phase, the traders or investors that lost the chance to accumulate in the first phase are now aggressively buying the stock. Thus, the run-up phase is resulting in trading with a high volume of shares for the particular stock. 

The run-up phase makes the market stronger by inviting many investors and traders to enter for trading. Since the number of shares purchased, volume and traders are increasing in this phase, it is also known as the growth phase. 

With the improvement of business matters and growing investments, the stock price remains in an uptrend movement. 

Trading Aspects to Remember:

• Mark-Up Phase is the best phase to make money as a trader, as it shows numerous upward movements. 

•  Declining market is an opportunity in this phase too because it is an opportunity to buy shares. 

• Growth phase is beneficial for momentum traders because the high prices and low prices help the short-term traders and swing traders to be in momentum. 

When the phase declines, the market becomes strong, but the price moves with slow momentum every day. Therefore, the accumulation and distribution phase are the crucial moments for a trader. Next, we will learn about distribution. 

1.3  Distribution Phase

The distribution phase is the third stage of the stock market cycle where the accumulated share traders begin to exit the security. Thus, this phase is also known as the reversal stage. 

The distribution phase is known by investors and traders who value the correction in the market. Everybody knows that good times do not last long, therefore large investors begin to sell their accumulated shares. 

Interestingly, you will observe in the distribution phase that the market will go through a hard-sell off, but it would not make the market trend downward. This is because the sold shares are often distributed to small investors. 

The security price is most likely to move in a sideway market trend because the market has become overvalued, and sell-offs are generated as well. Although, the security price will show bullish movement the demand and supply for the share will be equal approximately. 

Trading Aspects to Remember:

• Great opportunity for short traders to take a short position in the market. 

• High volatility in the market during this stage which makes it a trading opportunity for day traders. 

• Momentum traders should ignore entering this trade. 

• Some of the chart patterns which is formed in the distribution patterns are head and shoulder pattern, bottom top pattern etc. 

1.4  Run-down Phase or Mark-down Phase

The last stage of the stock lifecycle is the declining stage which is not a favourable time to make an entry by the investors and long traders. 

The sell-off in this phase is generated by the traders’ purchased stocks in the distribution phase. The demand for security falls hastily by keeping limited buyers for the stock. 

The run-down phase signifies that the market is heading towards the accumulation stage back to its origin. Sometimes, the decline takes place due to bad news or the business position of the company. 

One should be careful to trade in this phase as the fall can predict false movement or incorrect signals. The last stage is the mark-down phase, also known as declining phase and traders should identify this stage through the amount of demand and supply needs in the market. 

This is the stage which ensures that what goes up, must come down to correct the markets. 

Trading Aspects to Remember:

• Traders should be careful of their emotions in this phase and should rule out trading as per plan. 

• A reversal takes place in the markdown phase with a downtrend. Traders can enter into long trades when the market settles and shows an opportunity of entering. 

• The stock prices will be lower than expected therefore, traders or investors should not panic as some phases don’t last forever. 

• Investors can be keen to hold on to some shares when they observe higher lows in the chart. It signifies entering into the accumulation stage. 

 

 

Conclusion 

Financial learning is important for everyone but understanding the phases of the stock market cycle is compulsory for traders and investors. The ability to make correct decisions is formed by understanding these four phases. A trader can rectify their mistakes of selling, buying or holding the shares in wrong phases. 

A good way to understand these phases is to read the previous years’ charts of securities and indices. One can adopt this practice to find out the accumulation, mark up, distribution and mark down stages. 

Remember that a trader can learn several indicators and numerous strategies, but if they don’t know the phases it is critical for them to apply even simple indicators. Thus, trade effectively by learning about these phases. 

KEY TAKEAWAYS 

• Stock market cycle consists of four phases – accumulation, mark-up, distribution and mark-down.

• Investors accumulate shares as a long position in the accumulation stage

• A Large number of buyers and volume is present in the markup stage. 

• Accumulated shares are sold off in the distribution stage. 

• A Large number of sellers with low volume brings down the market.