The history of the stock market is cyclical, it has its ups and downs. I’m more concerned with what the stock price will be tomorrow rather than yesterday. I know there is a lot of money to be made in the short term, but it’s not for all investors.
Many investors don’t understand this, and today’s market day traders take full advantage by selling a stock just before it moves 10% to 20%. It’s a brutal, ruthless business. The average investor thinks this is a very short-term investment and is easily duped by those short-term traders.
I am a long-term investor, and my philosophy is simple: look at the big picture. Do I need that stock at this price – if so, would I hold it for 1 year or more? If I did, would I buy it at this price and take the risk of selling it at a discount – would I buy it at all?
I want to buy great companies that are about to make a big move up in price. I don’t care whether it’s 10% or 20% – I want to buy them. I buy great companies because they are about to do an upgrade – it’s part of the culture of the company to do this at a quarterly earnings report and upgrade the bottom line and change the guidance – as an investor this excites me.
The beauty of long term investing is that I always know the truth – I know when a company is about to do an upgrade – there is always at least a 30% chance that a company is going to do a big upgrade – which is why I buy great companies at great prices. And I make a profit by selling at high prices – so by definition, I am selling at low prices.
What I do not know – what most investors don’t know – is when a company is about to do a big move down in price – and for that, we need to use some sort of mathematical algorithm.
It’s called technical analysis – the goal is to identify trends – and protect profits – and identify bottoms – and identify supports – and identify stops – I use both Fundamental and Technical analysis.
The big problem is that most investors don’t understand why they are buying a stock and why they are selling a stock – they simply buy it or sell it because it looks good on the graph.
As an investor, we need to understand why we are buying or selling a stock. We have to know the company’s fundamentals, and why we believe a stock is bottoming out or coming up. We must have a set of rules to follow that eliminate emotions and control our decisions on the mathematics of our stock.
We need to know when and why we are buying, and when to know when and why we are buying. The best method to accomplish this is to use historical and technical indicators with stock charts to identify buy and sell signals.
This is the system I use to pick stocks.
- Historical Stock Chart – to identify buy signals
I use historical stock charts to identify buy signals, soI have data for several years, and each year the data overlays the top and bottom price levels. The current year’s chart is the last year used. This lets me see what the stock was doing in the very recent past – and it lets me see how the stock has been acting as a percentage of its normal trading range – which makes this method better than using the last month alone as a signal.
Example – for a stock that is trading at $25 and is about to bottom out at $20. I would look at a historical chart and see if there have been 4 years where it closed down at 20 or more and then rebounded. If I could find those 4 years I would consider that stock a buy.
This tells me a lot about the stock – if it has done that 4 years previously AND in the current year the stock is a buy. It also lets me know how risky the stock is which means I can decide whether I want to take a smaller position or not.
For example – for a stock trading at $25 and recently bottomed out at $20, I would look at a historical chart – but would have a MUCH harder time finding a buy sign than if I was looking at a stock that was bottomed out at $30 instead of $25 (or any other number below $10).
- Technical Indicators – to IDENTIFY SIGNALS
I look at some technical indicators to see if I am about to get a buy signal. I use the MACD, Bollinger Bands, stock oscillators, and stochastics – as well as other indicators I create – but I look for consistent activity along with a lower bottom for any buy signals.
Example/Use – a stock that just traded up to $24 should be considered a buy as you don’t need to look at a detailed chart to know it is oversold. As a buyer, I watch the MACD (which is typically at zero) and the stochastics. If either of those two indicators starts to cross above zero it becomes increasingly likely that a sell order is appropriate.
- The most critical aspect of trading is the decision to sell. It must be YOUR choice. You are not going to have discipline if you are constantly checking our charts, looking for signs that the trend has changed, and running back and forth from our position to see if it might’ve been better a few minutes earlier.