There are three important market phases: Trending, Trading and Sideways Markets.
• You need to identify and distinguish between these phases.
• We will have a somewhat different approach in our Analysis and Planning depending of the phase.
No market or instrument will go in just one direction for ever, although a Trending phase on a stock/share may sometimes continue for months and even years.
1. Trending Phase
In an uptrend we get Higher Highs and Higher Lows, in a Down Trend Lower Lows and Lower Highs.
For an investor or long term trader this is the most important phase.
An investor will in an uptrend ad to his position on pull backs or corrections. Most often long term investors will have a Buy and Hold view.
A speculator must, in an uptrend, try to buy the lows on the pull backs or corrections, and take profit on the highs.
In a Down Trend investors might take a hammering with a Buy and Hold view. It is of course possible for an investor who does not want to sell his shares (maybe for capital gain tax reasons) to do a temporary hedge by selling CFD’s on the same share. He may then on a lower level buy back the CFD’s and stay long the shares. Another strategy might be to sell call options against the shares for premium (income).
Indicators like the RSI and Stochastic may in an Up Trending Phase get stuck in the Over Sold position for a long time without you getting as sell signal. But, if you get a pullback on the RSI or Stochastic without prices making a pullback, you might get a very good buy signal for a trend continuation trade.
2. Trading Phase
For a Speculator the trading phase can be very profitable. You will look at buying support and sell resistance. The RSI and Stochastic Indicators may create good buy and sell signals in a trading phase.
For an Investor the trading phase will not be great, your shares will gain value, just to lose it again. Of course you might get dividend income that can offset your losses.
3. Side Ways Phase (congestion)
In a side ways phase prices may get stuck in a narrow range between a support and resistance. This price range may be too tight to do any profitable trades.
The good news of congestion like this is that after a period of time there will often follow a strong and violent breakout, maybe starting the next Trending Phase.
A speculator must stay out of this market whip lashing is a great probability if you try to trade here. Wait for the breakout that will often happen. We will discuss this trade later on.
Investors may not get any capital gains but will receive dividends.
An indicator that may come in handy here is the Bollinger Bands.