What is the best stock market investing strategy? “When is the best time to buy/sell stocks?” That’s the million-dollar question, lingering in the back of every stock market investor’s mind. It pays to observe the price movements of stocks. Market timing is a debatable subject, when it comes to investing strategies. Some investors are for it, while there are those that claim it’s impossible.
In a nutshell, market timing is a buying/selling investing strategy, built upon the concept of beating the market, by predicting its price fluctuations. The projections dive into technical analyses, to assess the market and economic conditions. If the investor accurately predicts the price movements, he can move his assets quickly, and turn it into profit. Investors use this strategy, to predict if the invested asset is set to rise or tank.
In this guide we will go over several popular investing strategies used by successful investors with considerable favorable results.
Trend Following. For starters, a basic strategy that is used by many investors, of all experience levels. This strategy is widely followed because of its simplicity to identify and invest, and many times, strong trends can bail you out of an imperfect set of buy and sell rules.
A popular investing expression is, “the trend is your friend.” This expression has stood the test of time, because many investors find it to be a critical building block of an investing plan. Before we delve into the basics of Trend Following, it is important to first explain why trend investing is a popular strategy, used by many new and experienced investors.
Trend following is a simple way to cover up some strategy imperfections, by identifying the strongest trends in the market. For example, if the market is moving up in a strong trend, it isn’t as important what the strategy is used to time entries, you simply need to be buying. When you trade in the direction of the trend, the rest of your investing approach can fall right into place. This doesn't mean that all your trades will be winners. It does mean that you don't have to be exact in your entries and exits, once you find a strong trend.
Now how do you know when a trend starts, and when it is going to end? This is the $64,000 question. Later on, I will touch on several techniques that will help you identify those elusive buy and sell signals.
Buying the Dip
This basic investment strategy refers to purchasing more assets as the price falls, or once it settles. This move is best recommended to use in a stagnant or bull market, where the usual trend is rising or sideways, rather than in a bear market, (general direction is downwards).
The logic of the “BTD” strategy involves analyzing charts, short-term and long-term average movements, historical support trends, and laddering buys. Investors can “buy big dips,” or “little dips.” The former refers to when the price drops below average, while the latter means when the price falls from wherever it placed last. People who buy dips can choose to sell fast for a profit, or hold onto it, to build a long-term position, or use it to incrementally take gains. Bottom line, the crux of the strategy is to buy at a lower price, not high. Doing so gives you less room for big mistakes.
Buy when it rates lower than the average historical performance. While purchasing a dipping asset is an ideal strategy, it’s hard to tell how the price will perform, in the next hour or the following day.
Educated guesses based on analysis can only give you enough information. Meanwhile, there’s another way you can consider entering the market. When the price of the asset rates lower than its average historical projection. A good charting tool can provide you with a “moving average” chart, that illustrates the best possible points to enter and exit the market.
What You Need to Succeed in Stock Market Investing
Now, in order to succeed in stock market investing, you need a solid knowledge before you get started. Hopefully you'll get some of it here, in this guide. Be aware, though, that just reading this video will not automatically make you an instant millionaire. You’ll learn some facts and strategies, but in order to make the most out of this guide and become the investor you want to be, you’ll have to adapt the ideas that you’re about to learn, to what you already know.
For starters, you need to learn how to read the charts. Charts are your main weapon in winning the stock market wars. Well, maybe I'm a bit melodramatic here. Charts are a vital resource for a serious investor. Actually, any valid strategy involves reading and analyzing charts.
Basically, the charts allow you to predict the future course of a stock, by finding patterns in its past price movements, and after all, this is what we need to win a trade. Don't be intimidated by the charts, actually they are not that hard to read and understand. Strategies that are based on reading and analyzing charts, are part of the technical analysis area.
Technical analysis follows a straightforward set of rules, freely available on scores of websites. Happily, the simplest rules in charting tend to be the most reliable. Later on, we will go over several strategies that you can apply in your trades.
The most basic form of technical analysis would be to look for support and resistance levels that markets have struggled to break through in the past. Charts in this way works best in moderately volatile markets. Technical analysis is also useful in identifying trends.
Another simple way of using charts is to look at moving averages, such as the average price over 10 days. The idea is that this gives you a better representation, of what the price is doing over a longer period of time.
Developing an Investing Strategy - Entry and Exit Signals
The investing strategies featured here are based on technical analyses. Note that this guide is intended to serve as a primer and a starting point. To take full advantage of the strategies presented here, you need a level of technical analysis knowledge that is beyond the scope of this article.
However, you can easily find information online to complement your knowledge. Once you want to apply any of the strategies presented here, simply run a Google search using the title of the strategy as the search term, and you'll find plenty of information that will allow you to obtain the knowledge you need to put that strategy into effect. Now, let’s discover some effective investing strategies, and buy and sell signals.
The Moving Averages Strategy
Moving averages gives you a hint as to the direction of the market; this is useful in identifying a trend. A trend is a good entry signal. A disadvantage of moving averages is that they tend to leg the market, thus you need to use short period moving averages, such as a 5- or 6-day moving average, to reflect the current price action.
Moving averages are the most basic and most utilized technical indicator. They are used for smoothing the price movement. Moving averages are used as a trend line, which adapts to price changes, not just as a regular trend line. The Moving Averages strategy gives you the following signals.
If the closing price moves above the moving average; this is a buy signal. If the closing price dips below the moving average; this a sell signal.
The Crossover of Moving Averages Strategy
Crossover of Moving Averages is another strategy that can help you identify a trend. This comprises of two moving averages. A fast moving average, (e.g. 10 bars), and a slow moving average, (e.g. 15 bars). The slow-moving average needs to use a larger amount of days than the fast one.
A crossover is regarded as a basic form of signal, and is preferred amongst numerous investors since it eliminates all emotion. The standard kind of crossover is when the price of an asset moves from one side of a moving average and closes on the other.
Price crossovers are employed by investors to spot changes in momentum, and can be used as a simple entry strategy. A close above a moving average from below may suggest the beginning of a new uptrend. The Crossover of Moving Averages Strategy gives you the following signals. When the fast-moving average crosses the slow moving average from below; that's a buy signal. When the fast moving average crosses the slow moving average from above; that's a sell signal.
The Turtle Investing Strategy
The Turtle Investing strategy is quite popular among many investors, search the internet for explanations as to how to make full use of it. In essence, the turtles evaluate the high and the low over the past 20 days. The Turtle Investing Strategy gives you the following signals. When the current prices move higher than the high of the previous 20 bars; that's a buy signal. When the current prices move lower than the low of the previous 20 bars; that's a sell signal.
The Moving Average Convergence Divergence Strategy, (MACD)
The MACD strategy is another indicator that is useful in identifying trends. This indicator takes advantage of the relationship between two moving averages of prices. Most investors use the difference between a 26-bar exponential moving average, (EMA), and the 12-bar. This difference is then plotted on the chart and oscillates above and below zero. A 9-bar EMA of the MACD, called the "signal line," is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.
The MACD strategy can be used in various ways, however the most popular is to use the signal line, for entry signals as follows. When the signal line crosses the MACD from below; that's a buy signal. When the signal line crosses the MACD from above; that's a sell signal.
The Williams Percent Range Indicator Strategy, (Williams %R)
The Williams %R strategy developed in 1966 by Larry Williams. Its purpose is to help identify overbought and oversold positions in the market. This indicator is categorized as an “oscillator”, because the values vary between zero and “minus 100”. The indicator chart usually has lines drawn at both the minus 20 and minus 80 values as alert signals. Values between minus 80 and minus 100 are interpreted as a strong oversold condition, or selling signal, and between minus 20 and 0, as a strong overbought condition, or buying signal. The Williams %R strategy gives you the following signals. When the indicator has a value above 80; that's a sell signal. When the indicator has a value below 20; that's a sell signal.
Relative Strength Index Strategy (RSI)
The Relative Strength Index strategy is yet another overbought/oversold signal. It was created by Welles Wilder. The goal of the Relative Strength Index, is to determine the comparative changes that occur between the higher and the lower closing prices. The index is used by investors to determine overbought conditions and oversold conditions, which then provides them with highly useful info, to help establish entry points and exit points, of the underlying asset. The RSI is an oscillator, and its line ‘oscillates’ between the values of zero and one hundred. The values of 70 and 30 are viewed as significant values, since above and below them, are the overbought and oversold areas respectively. Just about any value above 84 is regarded as a very strong overbought situation, and produces a ‘sell’ signal, while every value below 15, is regarded as quite a solid oversold situation, and produces a ‘buy’ signal.
The Relative Strength Index Strategy gives you the following signals. When the RSI crosses the 70-line, overbought-zone, from above; that's a sell signal. When the RSI crosses the 30-line, oversold zone, from below; that's a buy signal.
The Bollinger Bands and Channels Strategy
"Bollinger Bands" incorporate a moving average and two standard deviations, one above the moving average and one below. The main thing to understand about Bollinger Bands is that they consist of up to 95% of the closing prices, according to the settings.
Investing Bollinger Bands can assist you to fully grasp a number of characteristics of an asset, such as the high or low of the day, whether the asset is trending, as well as whether it is volatile or stable. Sometimes while investing Bollinger bands, you will notice the bands coiling really tightly, which indicates the asset is investing in a narrow range. This is actually the trigger to look at, for a price breakout or breakdown. Often large rallies start from low volatility ranges. When this occurs, it is termed as "building cause", this is actually the calm before the storm. The Bollinger Bands Strategy gives you the following signals. When prices move above the upper Bollinger Band; that's a sell signal. When prices move below the lower Bollinger Band from below; that's a buy signal.
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