I first learned about the stages that stocks go through from Stan Weinstein’s book, Secrets For Profiting in Bull and Bear Markets. This was a big turning point for me. It solidified in my mind that I had to buy stocks after a wave of selling had occurred – not before.

The concept is easy to understand. Stocks go through four stages:

  1. The Basing Stage: Stocks consolidate as buyers and sellers move into equilibrium.
  2. The Advancing Stage: After a breakout from stage one, stocks move into an uptrend – the second stage.
  3. The Top Area: The uptrend stalls and the stock tops out. This is where you likely see a head and shoulders pattern or a double top.
  4. The Declining Stage: The stock now falls into a down trend as the sellers take over and drive the stock to lower prices.

This cycle is repeated over and over again for every stock in all time frames. Stage 1, Stage 2, Stage 3, Stage 4, Stage 1, Stage 2, Stage 3, etc.

Here is a graphical representation of the 4 stages:

stock market stages

Now take a look at the following stock:

stock in a stage two uptrend

After consolidating for months, this stock broke out in June. Now, this stock is clearly in a stage two uptrend. And we want to be a buyer when stocks are in stage two uptrends.

But, when?

Look again at this stock chart where it is numbered. There are stages within stages! When you see a pullback on a stock chart, what you are really looking at is just a “mini” version of stage 4.

And we are expecting the cycle to repeat.

When a pullback stops going down, the cycle starts over. It is in stage 1.

Then, we look for a signal (candlestick pattern) that the stock is moving into a new “mini uptrend” (stage 2). This is where we buy the stock. And if it moves higher, we have a winning trade (assuming that we can get out at stage 3 – before stage 4!)

What I have just described to you is the core philosophy behind swing trading.

You are trading the “swings”.

You are trading the stages within stages.