Price action is king. Price action eliminates all of the day-to-day news you hear in the news that rarely explains the real businesses. Price is either rising or falling. Day-to-day, week-to-week, year-to-year, etc. prices move up or down as seen by the Facebook (FB) chart below.
Upwards and downwards movement is pretty easy to see. If we look closely enough, you may see that price also moves sideways. It will move up and down over a period of time, but not really go anywhere. I like this diagram created by @ripster47 on TWTR. Give him a follow, he’s a breakout and growth trader and one of the best on TWTR.
Gerald Peters @fullauto11 teaches The 4 Stages of Price Movement which he picked up from Stan Weinstein’s Secrets for Profiting in Bull and Bear Markets.
This pattern is applicable on every timeframe, over short periods and long periods.
Everyone likes to chirp, “stocks only go up.” As a trader, that is attitude is going to get you in deep trouble. Even the best-in-class FAANG stocks move up, down, and sideways for long periods of time. Check out some charts below:
Following a poor earnings result, FB dropped 44% from the end of July 2018 through December 2018.
Over the course of a full year, AMZN dropped 31% over 364 days.
AAPL dropped 40% over the course of 3 months from October 2018 through December 2018.
NFLX dropped almost 80% over just 142 days from July 2011 through November 2011..
GOOG dropped 34% over 23 trading days during the Covid crash.
So what am I saying hear? As traders, it is extremely important to understand that all stocks move up, down, and sideways. “I am trading AMZN, so it should just go up.”That’s not how it works. Short term price action is dirven by emotions, fear and greed. A stock can rise 10% one day and drop 7% the next with no news and no company changes over those two days.
Short term price action is a result of fear and greed in the form of news, earnings reports, FOMO, analyst upgrades and downgrades, and company rumors. Long-term price action is most correlated with revenue growth .
Now that we’ve identified the 4 stages of price movement, how can we use the 4 stages to be better traders and investors? Identifying companies with the longest possible Stage 2 Uptrends and trade within these long-term Stage 2 Uptrends.