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Learn Price Action - Stage 2

Stages of the Market

There are generally considered to be four stages of a market: accumulation, markup, distribution, and markdown. These stages can be observed in the price action of a security and can provide valuable insights into the likely future direction of its price.
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Accumulation

During the accumulation stage, smart money (i.e. professional investors) is buying the security, but there is little or no change in the price. This is because the professional buyers are able to absorb the supply of the security without driving up the price.
Some characteristics of the accumulation phase include:
  • Low volume: There is generally low volume during the accumulation phase, as the professional buyers are able to absorb the supply of the security without causing much price movement.
  • Sideways price action: The price may move sideways or range-bound during the accumulation phase, as the professional buyers and sellers are in balance and there is no clear trend.
  • Lack of interest from the public: The public may not be interested in the security during the accumulation phase, as there is little or no price movement to attract their attention.
  • Presence of professional buying: The accumulation phase is characterized by the presence of professional buying, as the smart money is accumulating positions in the security.

Markup

As the professional buyers continue to accumulate the security, they eventually reach a point where they are able to push the price higher. This marks the beginning of the markup stage, during which the price begins to rise.
Some characteristics of the markup phase include:
  • Increasing volume: Volume tends to increase during the markup phase, as more traders become interested in the security and start buying it.
  • Upward price action: The price begins to rise during the markup phase, as the professional buyers are able to push it higher.
  • Interest from the public: As the price starts to rise, the public may become interested in the security and start buying it as well.
  • Presence of professional buying: The markup phase is characterized by the continued presence of professional buying, as the smart money continues to accumulate positions in the security.
  • Breakout from a range: The markup phase may be marked by a breakout from a sideways trading range, as the price breaks above resistance and starts to trend higher.

Distribution

As the price continues to rise, the professional buyers start to sell their positions to the public, who are usually late to the trend. This marks the beginning of the distribution stage, during which the price starts to decline as the professional sellers offload their positions.
Some characteristics of the distribution phase include:
  • Decreasing volume: Volume tends to decrease during the distribution phase, as the professional sellers are able to offload their positions to the public without causing much price movement.
  • Downward price action: The price begins to decline during the distribution phase, as the professional sellers are able to push it lower.
  • Lack of interest from the public: The public may become less interested in the security as the price starts to decline, and may start selling their positions as well.
  • Presence of professional selling: The distribution phase is characterized by the presence of professional selling, as the smart money starts to offload their positions in the security.
  • Breakdown from a range: The distribution phase may be marked by a breakdown from a sideways trading range, as the price breaks below support and starts to trend lower.

Markdown

As the professional sellers continue to offload their positions, the price continues to decline, marking the beginning of the markdown stage. This is typically a period of heavy selling, and the price may continue to decline until the sellers are exhausted and the demand from the public is able to absorb the excess supply.
Some characteristics of the markdown phase include:
  • Low volume: Volume tends to be low during the markdown phase, as the professional sellers have already offloaded most of their positions and there are few buyers left.
  • Downward price action: The price continues to decline during the markdown phase, as the professional sellers are still able to push it lower.
  • Lack of interest from the public: The public is usually not interested in buying the security during the markdown phase, as the price is declining.
  • Presence of professional selling: The markdown phase is characterized by the continued presence of professional selling, as the smart money continues to offload their remaining positions in the security.
  • Test of support: The markdown phase may be marked by a test of support, as the price approaches a key level where it has found support in the past. If the price breaks below this support level, it may signal the start of a longer-term downtrend.