Success in trading lies in the realistic objective of taking a big chunk out of the middle of each trend. This is done by confirming that the trend has begun and then waiting for confirmation that the trend has ended. In this way you will consistently achieve superior returns form trading. In the trusted words of W. D. Gann, the safest time to buy is early in the Ascent phase.

But what is the Ascent phase and how do you recognise it? Firstly, it is important to learn that there are 4 general phases a share price will move through – Accumulation (A), Ascent (B), Distribution (C), and Decent (D).

Accumulation – The period of accumulation is marked with an A. This company had just suffered a price decline and the price stabilized at the start of this chart. Within the recent decline, this share would have been out of favour with the market, especially the small investor. Those who were speculating in this share at higher prices are now holding this share in the hope of a recovery.

The accumulation phase can also see the reporting of poor profits and reduced dividends. The professional investors however see this as a period of opportunity. With extensive research, they have identified that this company is undervalued at the current price range. Furthermore, they may be aware of company activities from their research which may have a positive influence on profits. They begin to slowly accumulate stock from the market place. There is a supply of sellers willing to sell such as the mum and dad investors who need the money and can’t hold out for their break even point, so the price stabilises in a sideways pattern.

Ascent – The period of Ascent is marked with a B. As investors accumulate stock, the supply at that price range dries up. To continue purchasing stock, they must now pay a higher price. This is supply and demand at work. Around this time, new developments are often announced and this increases the interest in this stock by the professional investors. What you will often see as a result is increasing traded volume as investors rush to get the stock as cheaply as possible. The uneducated investor is unaware of this activity. The accumulation phase can be confirmed once the price has broken through any previous resistance levels (this concept will be discussed at length later in these modules). The price chart will also start forming higher troughs and higher peaks (again, this will be discussed at length). Our mum and dad investors who have held on to recover their losses and now happily selling.

From time to time, the share price will have a retracement. This is where the share price moves up rapidly on high trading volume. This momentum can not be sustained and the share price falls back to a more reasonable level in the short term, typically on lower volume. In the Ascent phase (above the B) you can see this type of peak.

During this Ascending phase, brokers begin to recommend the stock to individual clients again. The company makes the newspapers and this serves to only increase interest back in this stock. Over zealous estimates about future dividends often circulate, driving the price up even further. The occasional investor now starts to invest and speculate back into the market.

Distribution – The period of Distribution is marked with a C. The ascending phase ends once the price movement starts to flatten. The professional investor now starts to distribute their holdings back to the market place, thus taking the profit from this price rise. An increase in supply of shares to be sold prevents any further upward movement. Normally you may see a few peaks as the market tries to push the price higher, but there is a constant supply coming on to the market to prevent this, so the price fluctuates with increased volatility. The stock price is now overvalued, but the small investor is still buying after hearing good news such as strong earnings.

Descent – The period of Descent is marked with a D and is the final phase. As anticipated returns fail to appear, the demand falls away. Those who make the decision to sell increase the supply of stocks available for sale. With no buyers, the price falls. Once the price falls below the plateau of support formed by the distribution phase, then you are now in the descent phase. Lower peaks and lower troughs are formed on the price charts. Our speculators now abandon hope of making a profit and try to hold on until the price gets back to their purchase price to atleast break even.

For those needing to sell, the only way to do so is to accept declining prices. Demand falls away and the only way sellers can dispose of stock is to accept falling prices.
As an investor, you will actively search for stocks that are breaking out of an accumulation phase into the ascent phase. This is the best time to buy. Recognising the phases is easiest with support and resistance lines and these charting tools will be discussed shortly.