The 4 Stages of Price Movement
To trade the forex market successfully, one must first have a good understanding of the fours stages of price movement that each currency go through. The cycles will give you a better idea of whether to go long, short or stay on the sidelines.
Below are the 4 stages of price movement. These stages are similar in all time frames.
Stage 1: After initially seeing the price in a prolonged downtrend, the price of the currency will start to trade sideways forming a base. The sellers who once had the upper hand are now beginning to lose their power because more buyers come into the market. The price now drifts sideways without a clear trend. No one still believes in the currency.
Stage 2: Price movement finally breaks out of stage 1 into this stage and price starts to move in the upwards direction even though fundamental data that comes out are still negative and the outlook is also negative. Professionals understand the importance of this stage and see the change in trend. They start to accumulate by buying the currency while the novice accumulates by adding to their short positions.
Stage 3: After the price has trended upwards for a period of time, the price starts to trade sideways again. New traders have had enough holding their shorts and cover and they flip positions by now buying the currency! The professional have sold most of their longs out when this stage starts. This stage is similar to stage 1 and there is equilibrium of buyers and sellers making the price just drift sideways.
Stage 4: After some times, fear sets in for those who are long the currency and stage 4 is entered. Price starts to go down and then plummets. Most new traders will not believe in the downtrend. The fundamentals are still good and everyone still likes the currency. Those who are long hold and hold and hold and start to trade on hope that the currency will reverse back up again only to find out that she will not come to the rescue! Novice will even add to their long positions and forget about money management! Professionals know better and short the currency aggressively.
These are the 4 stages of price movement. Generally, you want to stay on the sidelines during stage 1 and stage 3, but if you recognize these two stages, you can still make pips by trading the upper and lower bound (resistance and support levels) by shorting resistance and buying long support. In stage 2, you want to be aggressively focusing on long positions and the reverse is true in stage 4 where you generally would focus more on short positions.
The image shows when price will go to an uptrend after stage 1. You can also flip the chart where stage 2 enters a downtrend and stage 3 goes into an uptrend. If this is the case just reverse the strategy mentioned above. :D
Happy trading!
Nice article.
Most of the traders has similar pic in mind while trading. But the problem is that only a few can predict correct future trend.
To trade the forex market successfully, one must first have a good understanding of the fours stages of price movement that each currency go through.
That is the main problem. Good understanding of this cycle comes with years of experience. No one can undestand it with perfection but with higher success percentage.
Simple to explain but difficult to understand.
The good or ill of a man lies within his own will. – Epictetus
@magnet.
It looks like that u have very good idea of these 4 stages .You trading account magnet 2012 is performing very nice.
Originally posted by ChampNice article.
Most of the traders has similar pic in mind while trading. But the problem is that only a few can predict correct future trend.
Yup true.
I agree with sasha that Forexdojo's account performance is really nice.
Great article, if you have these four stages in your mind then you can predict the market perfectly.
We need to learn all these things properly in order to benefit, I find it easier with FreshForex broker, I love it a lot. They have excellent educational setup, which allows one to do things well with understanding it, while the support service is also superb.