Stock Investing Strategies

Stock Investing Strategies

Everybody knows that stock Investing is not easy. This post is about looking at how you profit by trend following the index.

First, a brief summary: You may know that indexes always go up in the long run.

For example, if you look at the U.S. indices like the S&P 500, the Nasdaq, or the DowJones.

Although they go through ups and downs, only mentally in the short term, medium term and long term they go higher and higher because of population growth and cost inflation.

Table of Contents

Why stock investing

For a long-term investor, it makes sense to simply buy the index and hold it for the long term using ETFs or simply dollar cost averaging.

In fact, if you look at the last 30 years holding on to the Dow Jones is a long-term investment you would have gotten a total of 1040 percent.

An increase in your capital is equivalent to an annual growth rate of eleven points, but if you look at it from a medium-term perspective, things look quite different.

if you take a five-year perspective, for example, from 2006 to 2011, which was a very volatile period when we went through the great financial crisis, what if you take the buy-and-hold approach during that period?

In 2006, the DowJones was at about 11,000 points, and imagine if you had bought the index and held on to it. Five years later, in 2011, it was at about 12,000 points, which is a very small increase, in fact, as small as a break-even. So you can see that the hold-buying method only works over the very long term.

In the medium term, that is, in five years or three years, you can not buy and hold

because you can buy and hold for five years and break even, it really depends on when you bought.

stock investing
stock investing

Trend following when stock Investing

if you want to make money consistently in the short or medium term,

you can not just buy and hold a stock index, you have to follow a trend.

What does it mean? The consideration of market movements in cycles or trends.

A market may enter a phase known as an uptrend, in which the market is optimistic and the economy is growing.

In an uptrend, prices tend to reach higher highs and higher lows, so even if the price is falling,

it goes higher every time it goes down.

At the same time, markets would go into a downtrend from time to time, and downtrends can last one to three years.

A downtrend occurs, when a market goes through a period of uncertainty, crisis, and recession.

This occurrence of a downward trend during the financial crisis,

when prices are still going up, but every time they go up, they go much lower.

How to make money by following the trend?

To make money consistently in the short to medium term, you must follow this important principle,

and the principle is that you invest only in the trend.

The trend is your friend, which means that you only buy when the markets are in a clear upward trend.

Never buy when the markets are in a downward trend.

Because in a downward trend there is a statistical probability that prices will keep going down.

like a river current that you always want to follow and not swim against the current.

Just invest with the trend, at the beginning of the uptrend,

so that you profit from the market when it rises.

and the moment it turns into a downtrend, you’ve to get out at the beginning of the downtrend.

so when the market collapses, you’re not trapped and you don’t lose your profits,

And after everybody’s slaughtered in the market, you know it’s going to turn back into an uptrend,

and then you buy it back and resume the trend.

The reason is that many people, the majority of people in the world, including many professional fund managers and bankers, have no idea how to read trends, they’ve no idea when the trends change or what the trend is now.

if you recognize the trend, you can make a lot of money and at the same time save your heart and money when the next downward trend comes. so how do you read trends? how do you recognize when a trend is reversing?

Stock Investing Strategies

there are many strategies, the simplest is to use a moving average crossover technique. By using the 50 and 150-day moving averages, moving averages are drawn by the computer charting software that you use. It is all mathematical calculation. The software will generate these two lines for you.

how does it work?

in a downtrend, the 50-day average is always below the 150-day average. In other words: If the 150-day average is above the 50-day line, you should never buy or hold stock in the market because it is a confirmed downtrend and there is a likelihood that prices will keep going down.

at the same time, in a downtrend, you should always remember that both moving averages are trending down. The slope is really important, so again, in a downtrend, the 150 is above 50 and both moving averages are sloping downward.

So how do you know it’s time to buy? how do you know it’s a confirmed uptrend?

The first criterion is that the two moving averages must stop falling downward, that is, they must flatten and/or rise, and both must rise out of the flattening criterion.

The second criterion is the 50-day moving average must cross over the 150-day moving average. This is an easy way to remember clearly

in an uptrend, the 50-day moving average is above the 150-day moving average, and both moving averages are sloping upward.

if you’re in the market and bet on a trend, follow through to the end. You stay invested, but you need to know when to get out.

How do you know the trend has reversed to a downtrend again?

Both moving averages must have stopped sloping up they must be flat or sloping down. number two the 50 have to cross below the 150. so the moment you see that crossover and neither is sloping up anymore you sell you got to sell before the downtrend commences and

It’s that simple

if you put on the 50-day and the 150-day moving average, it becomes very clear when you should enter or exit the markets.

so if you go back to 2006, you can see that the 50 crosses above the 150 and that both are trending up, which is an up signal.
if it goes through a short correction, don’t sell, why? because it’s still an uptrend, the 50 is above the 150, it’s just what we call a dip in an uptrend.

Always buy the dip in the uptrend. When should you get out? The moment the 50 MA falls below the 150. When the 50 MA is trending down and leveling off, that is the time to sell and get out before the market collapses.

Many people do not understand this. they may have bought over here the

Notice that we are not attempting to predict where the market is going to go. we are simply following the trends.

so this is a very powerful method to profit by trend-following and notice again we are reading the medium-term trends now no system no painting is perfect right so

What’s the disadvantage of this method?

The disadvantage is that it’s a lagging indicator that reacts somewhat sluggishly, which also applies to the other direction. Again, it would be very slow to react, so that matter doesn’t get you to the bottom. it doesn’t get you up at the top, but it still makes you some pretty decent profits if you want to get in earlier and exit earlier.

That’s it for now. I hope you find this useful and can benefit from it as an investor.

Scroll to Top