Save Your Portfolio in 3 Simple Steps
If you want to become a successful trader, you must learn to embrace the chaos of the markets. That means watching the charts to get a handle on how the markets operate.
But don’t worry, it’s not nearly as complicated or as intimidating as it might seem. You’ll see what I mean in a minute when I walk you through it.
Learning how support and resistance work will make you a much better trader. That means you’ll be able to avoid the deadly land mines so many unsuspecting traders step on. It also means you’ll make a lot more money.
Even if you consider yourself a fundamentals-driven investor, you need to incorporate some charting into your strategies. But don’t worry, meshing technical with fundamental ideas is easy and painless. And once you do, I promise you’ll begin to rake in the profits that have proved so elusive.
You’ll also begin feeling much more confident in your investment choices once you master some small tricks.
To help you get started, I’ve put together three ideas you can use the next time you buy (or sell) an investment.
1. Spotting Technical “Value Traps”
Everyone likes a deal. So it’s no surprise that fundamental investors love stocks that are cheap relative to earnings, sales or book value. After all, why wouldn’t you want to buy a cheap, out-of-favor stock and hold it until its true value is realized?
But as you probably know by now, the realities of the market can easily derail your plans. Instead of buying any old “cheap” stock you come across, you need to exclude any names that might trap you in a losing position.
Here’s how you do it.
First, avoid buying stocks at or near 52-week lows. I know it might be tempting. After all, the stock is cheaper than it’s been all year. The typical investor logic here is that shares shouldn’t trade much lower.
But they can. And they probably will. Just because a stock hits a new low does not mean that it has found a bottom. Stocks move in trends — up, down or sideways. If a stock is moving lower, you must assume it will continue to do so until the price tells you otherwise. Even as an investor, you should never buy into a downtrending stock.
Let’s say you’ve done your research. You like a company. You think its shares are cheap but the stock is locked in a downtrend. Instead of buying, place the stock on your watch list and keep an eye on its chart. If and when the price appears to hit a floor and move higher, you can begin to plan your entry.
2. Buying Support
When you’re not bottom-fishing, you might come across a potential investment that’s trending higher. All that means is the stock is displaying a series of higher highs and higher lows on a daily or weekly chart.
In the case of an uptrending stock, you will want to time your entry to coincide with its support levels. For a longer-term investment, you want the best price possible — even when you’re buying a stock that’s moving higher.
Use moving averages or draw trend lines to determine where you should be a buyer:
In this chart, I’ve drawn a simple trend line. The arrows indicate where you should look to buy the stock. You don’t have to be too precise here. Just construct a line that best fits your particular chart. From there, you can use your judgment to determine when to plan your initial buy — or when to add to an existing position. It’s not rocket science, and it can help you make the right decision — or avoid making a bad one. Just don’t buy if the trend falls below the line.
3. Selling Strength
Of course, you also want to sell your position for the best possible price. Fortunately, the charts can help you pinpoint where shares might be running out of steam. If you’re holding an investment you believe has realized its potential value, you can use resistance lines to plan your sells.
Here’s the exact same price chart from above. Only this time, I’ve added different annotations:
By drawing a resistance line above this uptrending stock, you can see where the share price runs out of steam. The arrows show where price touches or briefly crosses resistance.
Again, your trend line doesn’t have to be exact. You’re simply using it as a general guide to help sell shares close to near-term highs.
Whether you’re new to the markets or a seasoned veteran, you should apply these time-tested trading techniques to your longer-term plays. They can save you from countless bad investments.