There are 2 broad philosophies in the globe of stock market investing. The initial is principal analysis and the next is technical analysis. In this page we will talk a low danger approach which gathers fundamental and technical analysis into a strategy that can yield amazing returns. Fundamental analysis is used to find the powerful firms in a particular sector while technical analysis is used to find the full trend of the market and the actual time to execute the trade.
Overview of the trading plan
This kind of analysis makes use of large economic indicators and firm financial statements to select the best firm to invest in. The general framework that can be used to do the analysis is listed below.
- Use charts to select the correct moment to trade
- Analyse each firm and find the ones that are powerful
- Find a list of firms that are aligned to your secret values
- Determine the present market trend
Determine the present market trend
Dow theory is set of techniques formulated by Charles Down from 1882 to 1902. Dow considered a trend to have 3 parts, initial, secondary, and minor. The initial trend can last for year, secondary trends are corrections primary trend and can last from 3 weeks to 3 months and little trends are corrections the last for a few hours to a couple of weeks. The big or initial trend is of interest here. The initial trend according to Dow has 3 distinct phases:
An accumulation Stage: This is the stage where the most astute investors are doing the purchasing.
Public participation stage: This is where most technical analysts begin to purchase because prices are going up and business news is perfect.
Distribution stage: This stage is when economic news is best, newspapers are printing right stories about the stock market and when public participation in the stock market is on the rise. This is where the informed investors start to “distribute” before anyone else begins selling.
It is vital not to purchase during the distribution phase or when the market initial trend is down. The market have about 3 to 4 year cycles when it is powerfully going up and then a period of about a year when the initial trend is down and the market price just decrease. Be alert of where the markets are in their cycle and when stock prices are priced too top as it is not prudent to purchase during this stage.
Find firms aligned to your values
It is vital to pick those firms that you can match to as an individual. Analyse all the things that interest you and the values that you match to and then select a firm that aligns to this. For instance, if you like restaurants and eating out then see if the restaurant chain if you like is listed on stock market. If you trust in them their worth then this is a best place to begin. If you don’t verify of gambling then it would not make sense to invest in a firm that has sports or casinos betting as their initial focus. Yahoo finance has a suitable listing of stocks and the sectors that they down in and this will permit you to find a firm that you can relate to.
Once a list of firms have been written down then the next stage is to analyse each firm to find how powerful they are in their industry. We are looking for firms so powerful that they have a monopoly in their industry. There is no other firm better or more creative then they are in the particular niche. The simplest way of finding this out is to look at the following detail:
- Earnings shock must be right for the last 2 quarters
- Growth estimate for next 1 year must be over 20 percent
- Growth estimate for next five years must be over 20 percent
- Net asset value or equity must be rising over the last five years
- EPS or Earnings Per share must be rising over the last five years
- Return on investment or ROI must be rising over the last five years
- Cash flow must be rising over the last five years
- Sales figures must be rising over the last five years
This detail can simply be found on Yahoo finance or the stock broking platform that are using for internet trades.
Use charts to select the best moment to trade
It is at this level that we switch from principal analysis to technical analysis. Charts are the top way to determine the best time to execute the trade. When we look at the price graph of a firm we need to check on 3 vital things.
- Ensure that the present trend of the stock is upwards
- The ADX indicator must be moving upwards
- The price of the stock must be above the twenty day moving average
The above 3 checks will verify that our stock is in a powerful upward trend and that we can purchase with confidence. The most danger that we expose ourselves to is one percent of our capital on any one trade. Our stop-loss must be located at a price below our buy price and the amount of our loss must not exceed one percent of our capital if we target this stop-loss. If the stock price moves upwards then manage the stop-loss so that we don’t lose more than one percent our capital if the stop-loss is target.
Quitting the trade
The key is to let the trade run as long as easy. This will make sure that we win large but lose little. A signal that can be used to quit the trade is if the ADX indicator goes over 40 and the indicator begins visually flattening. This means that the power of the trend is starting to diminish and it is time to quit the trade. If you are continually moving the stop-loss to follow the rise in the price you can also be prevented out of the trade.
The above technique uses principal analysis to find those firms that are powerful in the market and then technical analysis to execute the trade. A standard firm with powerful economic principals can experience price corrections but the initial trend will tend to be upwards. If the bullish trend is found early then perfect profits can be made with extremely little danger. The tactic of using a moving stop-loss will also reduce the danger of losing big amounts of finance. In summary you will have large wins and little losses and even if your win to lose ratio is even, best profits will still be made.