Chartered Market Technician (CMT) Practice Exam

Which phase follows the public participation phase in an upward trend?

1. Accumulation phase

2. Panic phase

3. Excess phase

4. Distribution phase

The correct answer is: Excess phase

In an upward trend, the phase that follows the public participation phase is the excess phase. This phase is characterized by a strong belief among investors that prices will continue to rise, often leading to speculative behavior and excessive buying. As the public becomes increasingly involved and optimistic about the asset's potential, prices tend to escalate rapidly, sometimes beyond the asset's fundamental value. Investors may exhibit a “fear of missing out” (FOMO) during this phase, contributing to unsustainable price increases. Understanding this phase is crucial for traders and investors because it signals that the market might be nearing its peak, where valuations may become inflated. Traders often look for signs of a reversal as the excess phase draws to a close, indicating the potential for a subsequent decline in prices as the market adjusts to more realistic valuations. The excess phase is a key component of market cycles, highlighting the emotional and psychological aspects of trading.