If you want to know how to invest in stock for interesting returns with low risk, I propose the use of triple crossing moving averages . This is a very well-known system, very simple, but not for that less profitable.
Before you comment, I must say that the chartist analysis is generally tricky .
I have tried everything: moving averages, supports and resistances, bands and oscillators, stars at dawn and dusk, figures of shoulders and heads both upside down, even some lost sternum out there .. and I have had very different results .
The problem I see with technical analysis is that sometimes it works wonderfully, sometimes horrible. In these last years of stock market anxiety, there have been times when the stands were pierced like butter, the stockings were crazy, and the figures seemed made by Picasso.
For this reason, the technical analysis has to be placed in context: if the bag is very volatile, better not to use it.
That’s drastic. At least in my experience.
Of course I’m not a great graphics analyst, I prefer quantitative analysis, and I only use the simplest chartist tricks.
Like the triple crossing. That simply consists of the crossing of 3 socks, short, medium and long term. For example:
In late July 2010, Alexion Pharmaceuticals ( ALXN ), took some time side, indefinite state. In August, the exponential averages of 5, 15 and 45 days converged at one point, and then, the stock began to rise, and the stockings separated.
A value that has the means of medium and long term very close is a doubtful value. Let’s say the market has a number of bullish people similar to the number of bearers. If in that situation begins a strong rise, or a strong decline, in many cases crystallizes in a sustained trend, which can be both bullish and bearish.
The advantage of these trends is that they are often long. And they are more sustained the longer the stockings have been together, that is to say, the longer the value has been in doubt. Somehow, a long lateral period helps an action to acquire “momentum”, e.g. bullish or bearish momentum.
When to buy. How to buy.
The first thing, before buying a value, is to study it, to watch it. And there are hundreds of actions, we need a graphics software that has access to the markets that interest us, (type MetaStock , or VISUALCHART ). And if we do not have chartists programs, we can use free tools on the web, such as Yahoo Financials , or stockcharts , or many others.
Therefore, the first thing is to create a basket of actions that are in lateral periods, the longer the better. We put in a spreadsheet the actions that have their means more or less close, and from there, we take a look every 2 or 3 days.
It is better not to follow too many actions. With 10 may be enough, but also depends on the time that we devote. Following a greater number of actions will cause us more mistakes. If we observe few actions, when one of them starts to shoot his stockings, we will realize more clearly and more quickly.
I have done a quick exploration of Nasdaq 100 stock to see what is currently in that state. This has come out to me:
I do not say that these actions will take off (or collapse) tomorrow; They are simply examples of actions on the takeoff ramp. Then you can do it, or not.
On the other hand, what means did you use ?. Normally we talk about exponential means of 5, 15 and 40/45 days. They can be somewhat different, depending on the type of actions that we are following. A few days up or down in stockings should not have a huge influence.
The case is that when some stock rises strong 2 or 3 days in a row, and your stockings begin to separate, we buy. But when exactly? We have three options:
1- Buy at the moment that the 3 means separate 1% or 2% (although this percentage can increase in the case of very volatile stocks). That is, generally buy fast. The advantage of this method is that we will catch the trend from the beginning, so, if tie ne success , we will get higher returns. The disadvantage is that we will have a greater number of false signals.
2- Wait until the action exceeds a previous resistance, that is, a maximum of the action at an earlier time not too distant. As in the example of ALXN:
The red line is the resistance of a last maximum. When surpassed, it is bought (green arrow)
3- The third option is to accumulate. That is, invest half of the capital at the time the stockings separate. Hold the investment, and when the trend is confirmed, either because a resistance is overcome or because there is a correction and then continues to rise, it is repurchased with the rest of the capital.
The second and third options are the most prudent. Although we could very well opt for the first option, (buy very fast) if we have found other indicators that confirm the beginning of the trend. Those other indicators may be other technical signals, or more frequently, recent favorable news about the company.
This style of investment can give great satisfaction when “we catch the good wave”. But it has a problem: the success rate is low, usually less than 50%. That is, we will have many losses and few operations to benefit.
If we want our mathematical hope to be positive, we need to lose little when we lose, and earn a lot when we win. For this, we must have the loss stops correctly located, and also hurry “the wave” as much as we can. That is, you have to manage the outputs correctly, because otherwise the method will not be profitable.
To not widen, I continue in another post, where we will see loss stops, exit strategy and possible results.
It’s a simple system, any investor can follow, right?