Definition of the cycle of actions


What is a cycle of actions?

A stock cycle is the typical evolution of the price of a stock from an early uptrend to a high price to a downtrend and a low price.

Richard Wyckoff, a prominent trader and pioneer in technical analysis, developed a share buying and selling cycle that occurs in four distinct stages:

  1. Accumulation
  2. Margin
  3. Distribution
  4. Reduction

Key takeaways

  • The stock cycle, often attributed to technical analyst Richard Wyckoff, enables traders to identify buy, hold, and sell points in a stock’s price performance.
  • The cycle of actions is based on the cash flows received to and from the securities by large financial institutions.
  • There are four phases of the inventory cycle: accumulation; margin; distribution; and discounts.

How Stock Cycles Work

Stock prices may seem random, but there are repeated price cycles, which are predominantly driven by the involvement of large financial institutions. As a result, the following cash flows reasoned to originate from these large players can be identified as occurring cyclically.

The Wyckoff stock cycle has periods of boom and bust, just like the business cycle. It can be used for portfolio management allocation, allowing for increased investment during the accumulation and margin phases and profit taking during the distribution and reduction phases. Investors measure a cycle of stocks by comparing the distance between the lows to help determine where prices are in the current cycle.

A trader must have a strategy to take advantage of price action as it is happening. Understanding the four phases of price action will maximize returns because only one of the phases provides the investor with an optimal profit opportunity in the stock market. When you become aware of the stock cycles and phases, you are ready to consistently earn profit with less shrinkage. Studying the cycles of stocks will provide investors with a warning about trending conditions for a stock, be it sideways, rising or falling. This allows the investor to plan a for-profit strategy that takes advantage of what the price is doing.

The entire cycle may or may not be repeated. You don’t need to predict it, but you do need to have the right strategy when it occurs.

Understanding the Phases of the Wyckoff Stock Cycle

  1. Accumulation: An uptrend begins with the accumulation phase. This is where institutional investors slowly start to take large positions in a stock. Investors use support and resistance levels to find suitable entry points at this stage of the stock cycle. For example, investors can begin to accumulate a value when it approaches the lower end of a well-established trading range.
  2. Margin: A break in the accumulation period starts the marking cycle. Trend and momentum investors make most of their gains during this phase as the price of a stock continues to rise. In this part of the trading cycle, traders use indicators, such as moving averages and trend lines, to help make investment decisions. For example, an investor can buy a stock if it returns to its 20-day moving average.
  3. Distribution: Institutional investors begin to undo their positions at this stage of the equity cycle. Price action begins to move sideways as the bulls and bears fight for control. A bearish technical divergence between the price of a stock and the technical indicator often begins to appear in the distribution phase. For example, the price of a stock may make a higher high while the Relative Strength Index (RSI) makes a lower high.
  4. Reduction: Volatility often increases during this phase as investors rush to liquidate their positions. Investors use temporary pullbacks to the upside as an opportunity to sell their shares, while investors look to go short to take advantage of falling prices. Margin calls typically rise near the conclusion of the markdown cycle as stock prices approach their lows, which may help explain the climatic volume that is often associated with this part of the cycle. of actions.
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Mark Holland

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