Understanding the phases of primary trends and reversal formations can be incredibly helpful for investors. By recognizing these patterns, investors can make more informed decisions about when to buy or sell assets, potentially maximizing their profits. In this blog, we will provide an overview of the three phases of primary trends and the three types of reversal formations.
The Three Phases of Primary Trends
1. Accumulation phase
2. Trending phase
3. Distribution phase
Primary or major trends consist of three phases: accumulation, trending, and distribution. During the accumulation phase, prices are generally rising slowly as buyers gradually accumulate more assets. This phase can be a great time for informed market participants to start accumulating shares at a discounted price. During the trending phase, prices start to rise more quickly as more buyers enter the market. Finally, during the distribution phase, prices start to decline as more sellers enter the market and start to take profits. This is the perfect opportunity for investors to keep their eyes out for undervalued stocks that have the potential to become more valued soon.
Fig. 1.1: The Idealized Three Phases of a Primary Bull Trend.
Understanding these phases can help investors know when it is time to buy or sell their assets. During the distribution phase, uninformed market participants are typically bearish and are selling off their shares at whatever price they can get. This is when informed market participants can start accumulating shares at a discounted price. The accumulation phase tends to last longer than the distribution phase as there is less capital and profit at risk. This is a great time to take advantage of the market and start investing in promising stocks.
The Three Types of Reversal Formations
There are three main types of reversal formations that can signal a shift in the direction of an existing trend: failure swings, non-failure swings, and double tops/bottoms.
1. Failure swings
2. Non‐failure swings
3. Double tops/bottoms
Failure swings occur when the oscillator swings above or below the extreme points of a trend but then fails to maintain the momentum and reverses back to the original direction. Non-failure swings, on the other hand, occur when the oscillator swings above or below the extreme points of a trend and manages to maintain the momentum. Lastly, double tops/bottoms occur when the oscillator swings to an extreme point, reverses back, and then swings to the same extreme point again and reverses back again in the original direction.
The term "failure swing" was first coined by Welles Wilder in his book, New Concepts in Technical Trading Systems, when describing the oscillator swings on the relative strength index (RSI) indicator.
Figure 1.2 : A Real-World Example of the Three Phases of a Primary Bull Trend.
Knowing these three types of reversal formations can be incredibly helpful for investors. If a failure swing occurs, it may signal that it is time to sell assets or get out of the market altogether. Nonfailure swings, on the other hand, may signal that it is a good time to hold onto assets or even buy more. Double tops/bottoms can be more difficult to interpret, as they may indicate a potential shift in the trend, but they may also be a temporary blip.
Conclusion:
In conclusion, understanding the phases of primary trends and reversal formations can be incredibly helpful for investors. By recognizing these patterns, investors can make more informed decisions about when to buy or sell assets, potentially maximizing their profits. The three phases of primary trends are the accumulation phase, trending phase, and distribution phase. The three types of reversal formations are failure swings, non-failure swings, and double tops/bottoms. With this knowledge, investors can be better equipped to navigate the market and make strategic investment decisions.
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