To help you recognize market cycles, you should have a good grasp on technical analysis. Stock market timing is a very important aspect when you are trading stocks. Stock market bubbles have led to market crashes numerous times in history, and learning to watch for the common signs leading up to the event is crucial. There are phases that a market goes through, and learning at what phase it is in will help you form a strategy to give you the best return from your stock picks. There are four phases that a market will go through.
Markets behave in a cyclical manner, they increase, peak, decline, and then bottom out. Once a cycle is complete, another cycle begins. The trick to staying ahead is to know in which phase of the cycle you are. Many investors fail to recognize these phases and forget that the market’s increase will at some point come to an end. There is no way to exactly pinpoint where the market phase will change. But by looking for certain signals, we can get a general prediction or where it might occur. This knowledge of stock market timing will help you avoid losing money.
The accumulation phase is where the market sentiment is still relatively bearish but has bottomed out. Many stocks have excellent value and are attractive to buy; this is good time to start stock picking. The mood turns from negative to neutral.
The next cycle is the mark up phase, and sees the market relatively stable and it is slowly increasing. As time continues, sentiment is starting to be positive and the bulls are cautiously stepping in. More investors start getting into the market, prices rise further and the sentiment is now very positive. Those who had invested at the accumulation stage now start selling to profit, causing the increases to start leveling off. Meanwhile those who were at the side lines see the market as being stable and start jumping in causing another increase. This situation in stock market timing sees the biggest gains in a short time, a sign the phase is coming to an end.
The distribution phase sees sellers start to dominate. This causes mixed sentiment. This can cause the market to stay locked in this position for many months. However, the distribution phase can come and go quickly. Investors at this time may be gripped by periods of fear as the markets decline and then start to rise as sentiment improves. This is a very confusing time for investors who are not sure which way the markets are moving.
The mark down phase is where the market is in decline, with investors who stayed on watching their stock picks going down in value. This phase will continue until the market starts to bottom out again, ending this cycle. Stock market timing is extremely important and investors should be aware of the risks if they get in at the wrong time.