The four stages of price, typically observed within market cycles, are Accumulation, Markup, Distribution, and Markdown. These distinct phases describe how prices evolve over time due to the interplay of supply and demand.
Understanding the Four Stages of Market Price
Prices in financial markets rarely move in a straight line; instead, they progress through identifiable phases that form a market cycle. These cycles reflect shifts in investor sentiment and the balance between buying and selling pressure. Understanding these stages can offer valuable insights into potential future price movements.
Here's a summary of the four key stages:
| Market Stage | What Happens |
|---|---|
| Accumulation | Prices build a base, trading sideways. |
| Markup | Prices rise, characterized by higher highs and higher lows. |
| Distribution | Prices stall, forming topping patterns. |
| Markdown | Prices fall, marked by lower highs and lower lows. |
Detailed Breakdown of Each Price Stage
Each stage has specific characteristics that define the prevailing sentiment and price action:
- Accumulation: This initial stage often follows a significant price decline. Prices tend to consolidate and trade sideways within a defined range. During accumulation, "smart money" or informed investors begin to buy, anticipating a future upturn. The market absorbs selling pressure, establishing a solid base as demand gradually builds.
- Insight: This phase is often quiet, with low trading volume, as the market prepares for a reversal.
- Markup: After the accumulation phase, the markup stage commences as demand consistently overtakes supply. Prices begin a sustained upward trend, forming a clear uptrend with higher highs and higher lows. Public interest and broader market participation typically increase significantly during this stage, fueled by positive news and growing optimism.
- Insight: This is often the most profitable stage for those who identified the accumulation phase.
- Distribution: This stage marks the maturing or nearing end of an uptrend. Prices often stop making new highs and consolidate or trade sideways, frequently forming topping patterns. During distribution, informed investors who accumulated at lower prices start to sell their holdings, offloading them to less informed buyers entering the market near what appears to be a peak.
- Insight: Volume may remain high, but the price struggles to make significant upward progress, signaling a potential reversal.
- Markdown: The final stage is characterized by a sustained decline in prices. Supply overwhelms demand, leading to a downtrend with lower highs and lower lows. This phase is often driven by increasing negative sentiment, profit-taking, and panic selling, continuing until prices reach a level where new accumulation begins, restarting the cycle.
- Insight: This phase can be swift and sharp, leading to significant value erosion for assets.
