Did you lose money in 2008 stock market down turn? Did you gain money in the recent stock bull-run started since March of 2009? If you invest in stock market but have no clear answers for these two questions, then this article is for you.
What I want to share with you in this article is to find out a way everyone can use to beat the market, to always keep yourself in the right side of your trade.
1. Trend, Trend and Trend.
In real estate market, you always hear people saying Location, Location and Location because location is just so important in real estate. In stock market, it is Trend, Trend, and Trend. Follow the trend. Never trade against the trend of the market. Many day traders do like to trade against trend and they can make profit. That is true. But if you are not a professional trader, then “follow the trend”.
In any trading market, there are three types of price movements (trends): trend-up, trend-down, sideways. Apparently, we should buy while the trend is up and sell while the trend is down. Sideway means the stock price does not have a clear trend. Not having a clear trend does not necessarily mean the market is not tradable. In fact you can make big profit in a sideway market as long as you have the right strategy. I will share the strategy detail in a separate article in my blog later.
2. How to identify a trend?
To identify up-trend or down-trend movement, the most popular and reliable method is to use moving average cross over strategy. Most people use 50 days moving average and 200 days moving average on stock daily price. We use 50 days moving average also called 50SMA(50 days Simple Moving Average) as a signal line and 200 days moving average also called 200SMA(200 days Simple Moving Average) as a base line. If you ask me what moving average is? You can simply Google it. It should be very easy to understand (I wish I can post charts here to show you).
In a stock daily price chart, if 50SMA moves up and crosses 200SMA, then the trend is up. It would be a buy signal. On opposite, if 50SMA moves down and crosses 200SMA, then the trend is down. You should sell or short. If you cannot short, simply stay in cash.
This is it. It is very simple. The most important thing is that you have to strictly follow this rule. Many people end up losing money because they always think, well, even I am wrong today, but the price probably will move up tomorrow. I can sell tomorrow with more profit or less loses. Remember, the biggest enemy in trading is your emotion. Follow this rule strictly.
3. Why do people use 50SMA and 200SMA?
This is a very good question. The answer is quite interesting though. It is simply because everybody is using it, especially those big banks and institutions. They all use it that way, so it works that way. Actually, there are mathematic and statistic theories behind it. If you are interested in it, welcome to do more research on this one. This article is for regular readers. So I don’t want to get too deep into this.
4. Why are there some people using 10SMA and 20SMA or other SMA pairs?
This is another good question. Speaking of trend, there are primary trend, secondary trend and minor trend. There are also long-term trend, midterm trend and short-term trend. 50SMA and 200SMA is for long-term trend or primary trend. DO NOT trade against primary trend. This is the first step and most important step people should take. People use 10SMA and 20SMA is because within a primary trend, a stock’s price could still go up and down that forms midterm or short-term trends. By catching those small trends, trades could be even more profitable. But that requires more skills and experiences. Before you can master primary trend, simply use the strategy in this article: follow the trend.