Understanding Market Structure
The “Understanding Market Structure” infographic you received a couple of weeks ago (also LINKED HERE) is packed with useful information designed to help you obtain a better understanding of market structure and equity money flows. Once you truly understand the cyclical flow of money in publicly traded stocks, then you can approach your trading and investment decisions with confidence!
Know in advance whether there is a favorable risk/reward ratio in a stock setup and then determine if it is worth making the trade. That is how professionals approach the market and that is how you should (and can) approach it as well!
Stock Trading Is Not a Hobby
Stock trading should not be a hobby. Hobbies cost money, not make you money. Alphatrends stock trading strategy has one goal and that is to MAKE MONEY!
Alphatrends will teach you how to
- Recognize trends
- Anticipate stock moves
- When to participate
- How to place stops
- When to exit
- Know when to be on the sidelines in cash
Look at the infographic Understanding Market Structure. You probably know the four economic stages of; Expansion, Peak, Decline and Recovery. Similarly, there are four primary stages to a stock’s lifecycle. In stock terms, the four stages are;
- Accumulation
- Markup
- Distribution
- Decline
Keep in mind that the stock stages and economic stages do not occur at the same time, in fact, market cycles typically lead the economic cycles. More on that another time.
The best profit opportunities occur while a strong trend is in place. This is why we focus on Stage 2 for long opportunities and Stage 4 for short trading opportunities. The very definition of an uptrend (higher highs and higher lows) is our strongest reason to focus on trading long a stock in an uptrend. With higher highs and higher lows it means that the sum of the rallies will always be greater than the sum of the declines in an uptrend. Simply put, there is more profit opportunity to trade in the direction of the primary trend. On the flipside, downtrends are defined by lower highs and lower lows, meaning that the sum of the declines will always be greater than the sums of rallies in a downtrend.
A Professional Approach
Simply buying a stock in an uptrend is not a consistently successful approach, just as shorting at any point in a downtrend is not the smart way to approach trades. In order to time our entries better we need to recognize that there can be conflicting trends on various timeframes. This is why we analyze multiple timeframes. The notes on the infographic will help explain this concept better but briefly.
If a stock is in a primary Stage 2 Uptrend and the shorter term timeframe is in;
1 – Accumulation, we ANTICIPATE the trade setup. This is when we do our analysis of the trends to determine our risk/reward ratio and we then wait for the stock to show signs of strength. When the short term timeframe enters the Stage 2
2 – Markup Stage we PARTICIPATE. That means we buy at the first signs of a higher high and then protect our position with a stop below the most recent and relevant higher low. While the stock continues higher our job is to raise stops under successive higher
lows and wait for market clues to tell us when to get out of the position. When the stock enters the Stage 3
3 – Distribution Stage, we EXIT the stock with our profits and look to redeploy the proceeds in another stock which is entering a fresh short term uptrend. When the primary trend is higher and the short term is in Stage 4
4 – Decline, we AVOID the stock. While it is possible to profit from the short term downtrend, odds are not strong for a meaningful move. Cash is a position, you do not have to be fully invested all the time!
See the infographic for the description of actions to take when the stock is in a primary Stage 4 Downtrend. For a thorough understanding of how stocks trade read Brian Shannon’s highly acclaimed book Technical Analysis Using Multiple Timeframes (link here)
Be sure to take advantage of your remaining trial and log into Alphatrends after 5:30 PM Eastern to see the trade scenarios for the next day.
