Stages of a stock

Today I want to talk about the stages in which a will pass through. The basic rule to follow when trading stocks is: Buy low sell high! Obvious, right? But how can you tell if a stock is low or high? A stock at $200 could be considered low while a stock at 8 cents could be considered high... It all depends on where it came from and where it is expected to go. You should never judge a stock by its chart alone. Always research your stock and see if the company has any new developments or business deals that are very recent or happening in the near future that may financially benefit the company. There are four stages in a stock. Stage 1, stage 2, stage 3, and, you guessed it! Stage 4! Here is a basic line drawing that I pulled off the internet:

I heard somewhere that stocks are not a reflection of of what IS happening. But a reflection of what is going to happen. You can see that stage 1 is when the stock has come from a recent spill and is now leveling off. This is when an experienced trader will be purchasing the stock. Stage 2 is when it is starting to climb again. This is what happens after a bunch of people have purchased a bunch of shares. Simple supply and demand. More people buying, price goes up. Stage 3 is when the stock starts to plateau. This is when all the experienced traders are looking to sell. A lot of inexperienced traders such as myself may have just caught wind of recent developments in the company and can already see the price starting to rapidly increase. We want to buy! Bad mistake. Once all the big players sell off their shares there is now more supply than demand and the stock moves onto stage 4. The downward trend. This is where you lose your money. This is why you do your research. Don't follow every stock tip you hear. Now the stock will eventually move back into stage 1 and repeat. All stocks trade at different speeds. There is no way to tell what will happen and when just by looking at a chart. It just helps to know what you're looking at. If you look at a chart you will also notice that stocks do not climb and fall in such a smooth manner. They go up and down on their way through the different stages. These are called waves. Here is another picture to help you understand.

Stage 1  involves wave 1 and 2. Stage 2 is wave 3, and wave 4. Wave 5, and wave A are stage 3. It is very important to be able to recognize these stages and NOT to let your greed cloud your decision to SELL. If you are good enough you will be able to identify and sell at wave 5. Wave B and wave C are stage 4. You do not want to own shares at this time. That's all for learning today. I suggest that you go look up some of your favorite stocks and see if you can analyze the charts. Next time I will be talking about ways to identify how strong the trend is and how to identify it so you know when to buy or sell :) Here is a 3 year chart of Tempur Pedic International Inc. If you click it you can see that it has just entered stage 4 and either wave B or C. Time to sell!

Happy trading!!

James