Lifecycle of a Stock

Dear Investor,

It is important to understand the life cycle of stock and its effect on your portfolio. It will help you decide to be in a stock or exit a stock.

Stocks have 4 life cycle phases

1. Base Builder Phase
2. Growth Phase - Uptrend
3. Topping Phase
4. Falling Phase - Downtrend

You will know these phases from Chart of a stock. Draw a simple chart along with 150 day moving average line. We will learn how to draw these charts later.

Basic Rule 1: A stock trading above its 150 day moving average line is in uptrend. A stock trading below its 150 day moving average line is in downtrend.

Let’s study the life cycle of JP Associates from 2007 till today and make a decision to buy or sell the stock today Nov 08 2009

Step 1 is to identify what phase are we in? Uptrend or Downtrend?

The JP Associate Chart Image below clearly identifies the Uptrend and Downtrend in this stock. The problem with this system is that it is simple.






Based on this chart correct time to buy the stock was 20 Apr 2007 at around 120 and time to sell the stock was 10 May 2008 at around 250. You would have gained 100%. That is doubled your money.

Next opportunity arrived on 7th April 2009 at around 100. The question is, should we sell the stock today at 220?

Answer is simple. The stock has not closed below the 150 day moving average line consistently. Until that happens we will not sell the stock.

Next question is should we buy this stock today? Answer is YES. Stock has just closed near its 150 day line which is a good opportunity to enter the stock.

You will sell the stock if it closes below 150 day moving average consistently.

BASE Building Phase

Next most important concept to understand is BASE Building phase.





Blue boxes above with text BASE 2007, BASE 2008 and BASE 2009 are called bases for the stock. This is the most volatile phase in the life of a stocks life. This is the phase were most of us keep getting in and getting out in the stock at loss. We loose most of our money in this phase.

Day traders make or loose lot of money in this phase of the market. This is different style of trading where risk is more and rewards are limited. The best entry is after the range bound trading is over and stock closes above 150 day line.

BASE BUILDER is a range bound trading in a stock. This phase could happen for days, weeks or sometimes months. After this phase is over, the true uptrend in the stock starts.


Can you identify when to enter or exit the NIFTY stock market chart? If yes then all my efforts to write this blog have paid off.

From above chart, it is clear that we are in bull market. This is the reason I keep telling you that we are in bull market and after this correction is over we will move higher. If we close below the red line for 4 weeks then the tide will change and we will be forced to exit the market.

The best point to enter the market is when it is near its 150 day line and holds that line. We are very close to that today.

Good Luck and God Bless

Thanks
Anil
Got a Question? mailto:indiastocktrend@gmail.com


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Stop Loss: Sell Stock if it closes below this price. It tells you that market has proved you wrong. Accept it.