Distribution and Accumulation are signs of weakness and signs of strength in a stock's price. Understanding what the insiders are doing and trading in harmony with them will make you a lot of money, and also protect you from losses.

As traders we want to buy into strength and sell into weakness, following what we call the "smart money" not the "dumb money".

Looking for this in chart patterns and monitoring the volume will tell you who is buying and or who is selling - are they accumulating or distributing?

I do believe that finding quality chart patterns is essential, mostly because trading good setups in liquid stocks allows for the best risk/reward relationship on the front end.

Volume is the essential driving force behind a stocks movement, so we need to have great pattern recognition to understand whether a stock will rise or fall in price. Ask yourself, is the volume rising?

Is the stock price at the top of a run and starting to fall? This is a sign of distribution (where the smart money sells off to the dumb money.)

When the stock is at the bottom, before a rise and the volume is rising, we call this accumulation (where the smart money is buying)

One thing I have learnt as a trader is not to listen or trade on news.  A great example of this was just last Thursday, 11th November, Jim Kramer on CNBC was spruiking investors to buy Gold as it was testing the $1,400 level. The following day I saw a rise in volume.

It was at the top of a run and starting to fall; distribution was occurring smart money selling to the dumb money. These are traps that the professionals use to off load stock.

Kramer was also very well known as Enron was collapsing (the biggest bankruptcy in the US history).  He was recommending it. Each time it fell in price he said "Buy on Dips" it's a bargain!
Remember the fund managers here in Australia, and Renee Rivkin was known for  doing the same thing with HIH insurance just before it collapsed .They were unloading their stock - it is a practice that happens over and over again.

So be careful who you are listening to I say "if you don't listen to news you are uninformed, if you listen to news you are misinformed"

Take a look at what happening in the chart below- the volume was rising while the price was falling.
 
Another one bites the dust- Babcock and Brown is another example. Quality pattern recognition and rising support lines or ascending triangles we use as confirmed entry signals.  We never entered because we never got a buy signal, being saved once again by the spruikers shouting "Buy on Dips".

Never try and catch a falling knife!

More articles by this author

How to Bank Like Buffet Using Covered Calls 19 May 2012

In one day Warren Buffet's $5 billion investment in the...

Read More >>

Stock Splits19 May 2012

In the 1990’s the top technology stocks were spectacularly successful...

Read More >>