Ride the trend
Think of it this way, your stock is a small yacht in the ocean. And the ocean is the broader market such as the major index that comprises your stocks. If the ocean waves are moving up it's gonna carry your small yacht with it. The same is true on the downside. It is unwise to fight against the waves, but better to ride them. This is not a crowd-following mentality; it's quite different. The crowd chase market tops and run away from market bottoms. They are always behind the curve and late to the party. You have to be ahead of the crowd, and follow the smart money. The other upside of getting in early is that, you are less likely to get shaken out as you would have already made some gains when the security starts to consolidate after periods of appreciation.
Understand yourself and how you respond to the daily gyrations of the stock market, and how you emotionally deal with your losses. Find out if these emotions are actually helping or harming your trades. You always want to be having a clear and open mind when you are trading. Reflect on your mistakes as well as your wins. What did you differently this time that made you win or lose. Everyone has a different risk appetite. Higher risk does come hand in hand with high rewards, but try to keep it under control or work around it if it's too crazy. You want to stay in the game as long as possible until you have honed your skills. Finally, Keep your goals realistic, and tailor a strategy that is fitted to you.
Understand yourself and how you respond to the daily gyrations of the stock market, and how you emotionally deal with your losses. Find out if these emotions are actually helping or harming your trades. You always want to be having a clear and open mind when you are trading. Reflect on your mistakes as well as your wins. What did you differently this time that made you win or lose. Everyone has a different risk appetite. Higher risk does come hand in hand with high rewards, but try to keep it under control or work around it if it's too crazy. You want to stay in the game as long as possible until you have honed your skills. Finally, Keep your goals realistic, and tailor a strategy that is fitted to you.
If you are losing money when you are just starting off, don't sweat it. It takes time to hone your skills, and believe that you are paying for your education in the market. Scan the market for securities that are at low valuations and look primed to breakout. I personally use TC200, a charting software by Worden Brothers to scan the market. The software breaks the market down into several sectors, and is great for scanning the market for breakouts and performance. This is especially useful in spotting deterioration in the stock market at market tops. There's a trial version where you can test things out as long as you have an email. The simple drawing tools are especially helpful for charting and technical analysis. They also have a lot of free high quality tutorial videos on technical analysis.
There are several ways to find out the trend of the market whether they are in a bull cycle, bear cycle or trading sideways. The quickest way to do this is to look at the moving average and the cross over of longer term moving averages and shorter term moving averages. You can also draw trend lines and channels as prices tend to bounce up and down in a range. Remember, the greater the number of times a trend line has been tested, the greater the implications when the line is breached. The longer a security stays in the basing phase the great the leg up or down when it breaks out of that base.
Bull market or bear market?
A Bull market is when a group of securities is rising and is expected to keep on rising. It is characterized by optimism, investor confidence and expectations that the strong results will continue. You can't predict consistently when the trends in the market will change. Part of the fact comes from effects that psychology and speculation play in the market. People are overly complacent and bullish at market tops. A bear market is the opposite of a bull market, and people are overly bearish at market bottoms.
It is important to identify major market trends and position yourself favorably with the trend. When a market is in a bear market you don't want to be on the long side. If you want to be, you have to be incredibly nimble (meaning short term trades) and look for oversold stocks. The only real upside for the bulls in a bear market is that the sectors that show strength and outperform the broader indexes during the bear market tends to lead the next bull market, so have a watch out for those during a bear market. You might consider shorting the market (betting against the market) during these bear market cycle. A lot of investors believe that shorting is very risky, this really isn't true at all. If you are unfamiliar with shorting, click here. When you are shorting at such times you want to short the rallies right after it starts to show weakness and roll over. In the stock market, this type of weakness is most notable in the deterioration in the sectors that comprises the major indexes. The major indexes will keep on making new highs, but and increasing number of sectors will start to underperform the major indexes. Small cap stocks are more volatile, and are the first to move at market tops and bottoms. The large cap stocks tend to follow the small cap stocks, and outperform the small cap during the middle of the cycle.
On the downtrend, small rebounds are known as "a dead cat bounce", the idea is that even a dead cat will bounce if dropped from a great height. This is usually confirmed with low volume on the rallies. This is the reality of the financial market since nothing goes straight up or down. On uptrends, you will always encounter consolidation. The challenge is to distinguish these moves and identify them for what they are. The easiest way to tell what kind of market you are in is to look at the shorter and longer term simple moving averages and look for them to crossover. Once you get used to it, it will become very easy to spot these market cycles on multiple time frames.
It is important to identify major market trends and position yourself favorably with the trend. When a market is in a bear market you don't want to be on the long side. If you want to be, you have to be incredibly nimble (meaning short term trades) and look for oversold stocks. The only real upside for the bulls in a bear market is that the sectors that show strength and outperform the broader indexes during the bear market tends to lead the next bull market, so have a watch out for those during a bear market. You might consider shorting the market (betting against the market) during these bear market cycle. A lot of investors believe that shorting is very risky, this really isn't true at all. If you are unfamiliar with shorting, click here. When you are shorting at such times you want to short the rallies right after it starts to show weakness and roll over. In the stock market, this type of weakness is most notable in the deterioration in the sectors that comprises the major indexes. The major indexes will keep on making new highs, but and increasing number of sectors will start to underperform the major indexes. Small cap stocks are more volatile, and are the first to move at market tops and bottoms. The large cap stocks tend to follow the small cap stocks, and outperform the small cap during the middle of the cycle.
On the downtrend, small rebounds are known as "a dead cat bounce", the idea is that even a dead cat will bounce if dropped from a great height. This is usually confirmed with low volume on the rallies. This is the reality of the financial market since nothing goes straight up or down. On uptrends, you will always encounter consolidation. The challenge is to distinguish these moves and identify them for what they are. The easiest way to tell what kind of market you are in is to look at the shorter and longer term simple moving averages and look for them to crossover. Once you get used to it, it will become very easy to spot these market cycles on multiple time frames.
Trade example #1
The chart below is of a favorite biotech company, GILEAD sciences Inc. There was a trend change around March when the price fell under the trend line, and started a bear market cycle. This was later confirmed when the 20 day simple moving average falls under the 50 day simple moving average. For more on moving averages, click here. In the chart, you can see that the 20 dsma crossed under the 50 dsma around mid March, in real time it crossed much later. This is called a whipsaw. The moving average indicators are the rolling average of a set amount of data points. As these data points changes with time so does the moving averages. The shorter the time frame that a moving average covers, the more prone it is whipsaw as a day's action have a greater impact on the average. Therefore it is not wise to always wait for cross overs as you could miss out on a large chunk of a good low risk/reward trade.
Around mid March there was a pretty obvious trade to the short side when prices breached a trend line that have been tested multiple times. The long trade around May to June is less obvious. However, it's important to note that a historic resistance had acted as a new support level on the long side. This was also where the level the 250 dsma was at during the time. Note the high buying volume around mid April, signs of strength, and commitment from the buyers. There were enough reasons to enter a position during the time.
Around mid March there was a pretty obvious trade to the short side when prices breached a trend line that have been tested multiple times. The long trade around May to June is less obvious. However, it's important to note that a historic resistance had acted as a new support level on the long side. This was also where the level the 250 dsma was at during the time. Note the high buying volume around mid April, signs of strength, and commitment from the buyers. There were enough reasons to enter a position during the time.
As of now, the stock looks overbought and is in unchartered area at new highs. Stochastic oscillators are a great way to recognize overbought and oversold levels. Stochastic compare current price to recent price range over a given time period. The closer it is to the green line the more overbought it is and the closer it is to the red line the more oversold it is. Stochastic alone is not a good trade signal, you need to incorporate it with other indicators like the Bollinger bands and moving averages. The stock may go up a few more percentage, but I would wait for a pull back to the 50 dsma if I were to buy. Personally I would look for better opportunities since I think the US stock market is quite overvalued at the moment. To learn how to manage your portfolio. click here.
Trade example #2
This is a chart of a solar company called solar city. If you drew trend line you can see that it was trading down in a channel. When the stock broke out of the channel, and broke through the 200 dsma on the second day, you could have chased the stock with a tight stop loss. Normally, I would have waited for the stock to retest the breakout on the daily, but I was convinced because the stock broke through the 50 dsma. Pay attention to the large volume on the break out. The exit was pretty obvious when the shooting star pattern developed which was followed by a hanging man candle stick the next day. This price oscillator also showed signs of it being overbought.
Trade example #3
This is gold. Gold broke down from a compressing triangle. I was expecting it to break up because of the long term consensus, but it became a pretty obvious trade to the short side when it broke the triangle. Gold found support at the multi-year trend line (not the one in the picture), and you should have exited and stayed in cash until further confirmation.
Trade example #4
You can probably tell by now why Facebook was a pretty obvious trade to the long side. For more on breakout patterns and technical analysis click here.