A bell curve is a plot of normal distribution of a given data set – in this case – market prices.
Again, please refer to "The Four Market Stages" Page for details.
If you look at any longer term stock, bond, commodity or currency chart, you’ll notice the cycle begins at the far bottom left of the chart, you’ll observe a flat bottom (prices are essentially moving sideways in a channel).
You will learn from reading below that the markets are far from random, that they move within an almost musical symmetry and flow - yes - the smaller "ebbs & flows" within the main price moves can appear random, as much of the market "noise" is, but the overall movement has "method" behind it.
This is known as the Accumulation Phase (Stage 1), where the “smart money” (the 10% of professional traders) are quietly accumulating (purchasing) their stocks (inventory).
Who is the "Smart Money"?
The Institutions:
The Big Banks, Insurance Companies, Hedge & Pension Funds, Mutual Funds, Sovereign Wealth Funds as well as very experienced traders - essentially all of the deep pocketed,
big money traders and investors.
The smart money must do their buying slowly & gradually in order to not drive prices higher too quickly, that is, until they have absorbed most of the existing supply
(the smart money's subtle way of "cornering the market").
This accumulation stage can last anywhere from several weeks to many months.
The public sentiment is that the stock (or stock indices) is boring and no one in the public (90%) is paying any attention.
Then, prices break out (to the upside) of this sideways channel (on high trading volume), which indicates that the buyers are now outnumbering the sellers – that is, the buyers are now taking control / winning the proverbial tug-of-war.
Since this is usually quite subtle, the public (90%) is still not paying any attention.
Now, we’ve entered the “glorious” Mark Up Phase (Stage 2), which is also known as a Bull Market. Now more and more people are buying and trading volume is increasing as prices are increasing - this is EXTREMELY important!
As prices continue to climb, the TV talking heads are starting to perk up and the public is starting to cautiously pay more attention – and some are even beginning to buy into this developing Bull Market.
Eventually things get frenzied – everyone is buying and everyone is talking about a market that’s headed for the moon!
As the late legendary trader, Jesse Livermore, said back in the early 1900’s: “When the shoe shine boy is telling me to buy stocks, that’s when I sell everything I own immediately!”
Now, the 10% (seasoned / consistent winning traders & investors) are quietly beginning to sell (Distribute) the shares they had initially purchased during Stage 1 (Accumulation Stage) and at the beginning & adding onto their positions purchased during the Stage 2 Bull Market and - upon liquidating / selling these previously purchased positions - reaping immense profits!
Who, you might ask, is buying from them?
You guessed it – the 90% of the (uninformed) frenzied buying public. That’s right, now everyone in the public is buying as many shares as possible (usually exactly at the wrong time)!
As this happens we begin the top of the bell curve, known as the Distribution Phase (Stage 3), where, as mentioned above, the professional 10% are quietly selling / distributing (unloading) their previously purchased shares to the unsuspecting public (90%).
Not only are they unloading previously purchased shares, but they are selling short new shares in order to profit from future falling prices. Prices become choppy & volatile and usually move sideways in a wide, "sloppy" channel.
This distribution stage can last anywhere from several weeks to many months and is well known (by the professionals) to witness VERY volatile price action as shares trade hands from the strong handed sellers (10%) to the weak handed buyers (90% unsuspecting public).
The public sentiment is still very bullish and more and more of the 90% (public) are buying like crazy!
Eventually, prices begin to break down from the sideways channel and we enter the Mark Down Phase (Stage 4), which is also known as a Bear Market.
Now more and more people are beginning to sell their previously purchased stocks, bonds, commodities, currencies, etc., however the majority will hold on and hope and pray for prices to reverse upward once again.
All of the financial talking heads are saying “grab these great bargains” as the prices continue to fall. Those that listen to them, intensify their losses!
Side Note:
As a trader (or investor), once you start trading on emotions, it's just easier to flush your money down the toilet!
A favorite quote from Al Rizzo:
"When a falling stock becomes a screaming buy because it cannot conceivably drop further, try to buy it thirty percent lower."
If you want to lose money in the markets, just listen to the "experts" on the financial news channels - they will all but guarantee that you will make poor investment choices over time.
They have an agenda / paycheck to protect - believe us - they're not looking out for your financial well being!
You must be able to "cut-through-the-noise" and there is a lot of it - some deliberately designed to distract and confuse, some just occurring randomly - either way - you must avoid letting the "noise" influence your behavior / trading method.
As mentioned above, the “smart money” has been selling short to the unsuspecting public, who is still caught up in the buying frenzy.
The “smart money” / 10% (professional traders) are now making huge profits as prices begin (and continue) to fall, while the public is continuing to hope and pray that prices stop falling and start to go up once again.
Eventually later (many times months and sometimes years later), market prices begin to stabilize (form a base) and we begin the Accumulation Phase (Stage 1) all over again, where the “smart money” (10% professional traders) are quietly accumulating (purchasing) their stocks (inventory).
And so the cycle starts all over again!
Two rules for investing/trading:
Rule number one : most things will prove to be cyclical
Rule number two : some of the greatest opportunities for
gain and loss come when other people forget rule number one
-Howard Marks
For More Details, See:
"The Four Market Stages" Page
Once you learn (through experience) to look for this ever-recurring cycle (or use an Advisory Service that’s aware of this recurring cycle), you too will be in that 10%
of consistent market winners!
The above information is meant to simply explain how to keep a trader / investor on the proper side of the market - the "how to" as far as actually profitably executing, monitoring and exiting trades is where an experienced Advisory Service comes into the picture.
Once again, it's important to remember, when it comes to the markets:
"What you don't know could hurt you VERY much!"
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In Addition (regarding the very important subject of Risk Management):
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