Beyond Know How

Whether a novice or an old timer, the hardest thing about stock investing is the selection of stocks and anticipating how they would perform.  There are many strategies available which do not give the same results. Moreover, a strategy that works well for a person may not work the same way for another.  Most people usually have the notion that investing requires profound and time-consuming analysis of financial and market data before choosing a stock. That is actually how some people do it.  In reality, formulating a strategy is more difficult that trading itself. Not all strategies always guarantee that you will make profits with the stocks you chose. People who have been trading for a long time still lose money even if they consistently do market analysis prior to their selection. So, you may ask, is there an easier way?

Not all of us have the training or education to enable us to understand financial statements, market data, spreadsheets and mathematical formulas.  It does not mean we are not qualified to trade and it does not mean we will be failures in the endeavour simply because we are unable to conduct a thorough pre-trading analysis. If you’re not the rocket scientist type and do not have time to spare for research, you can try limiting your focus, invest in growth industries, and invest in market leaders.  Let us say you are interested in the pharmaceutical industry, you should limit your sights to a particular sector of that industry which you believe has a high potential for growth, choose a market leader in that sector and that’s it.  There is not much in-depth analysis to gain the information needed for this selection strategy, but it doesn’t make investing less successful. I also recommend reading some investment software reviews to help you with analysis.

There are about a gazillion different technical indicators that traders can use but one of the simplest is also one of the best.  The moving average is simply an average of the last X periods of time.  A 50 day average would be an average of the last50 days.  They call it moving because every day you take the 51st day off and add today.  This creates a moving line that over time lags the market by a relatively consistent amount.

So how is the moving average useful?  Well one day in the market can just be a blip but several days of action can really add up to a real move.  Essentially you have a great measure of the trend.  If you have a 50 or 200 day moving average it is safe to assume that you can gauge the direction of the primary trend by looking at one direction the moving average is in.

There are several other types of moving average aside from the SMA simple moving average.  We have exponential moving average which weight the most recent days heavier then the older days.  There are weighted moving averages where you can choose what days to weight heavy and which to weigh lighter.  There are displaced moving averages where you bump it up a few days. There are even some moving averages that require high level math.  There is definitely a moving average that will go along with what you are trying to do and what you want.

This is obviously a great tool for the macro trader?  If you want to stay on the right side of the market you must use some tools to tell you what is happening.  Bty staying with the trend and trading in the direction of a longer term moving average you will be able to improve your risk to reward ratio and generate higher and more consistent returns over time.

Some of the more popular moving averages are the 50 day, 200 day, and 20 day to help gauge the short, medium, and long term trend.  Many people also move these out to a weekly timeframe with a 4 week, 10 week, and 40 week moving average.  Depending upon what you are trying to see or gauge you can even use a muli year moving average.  There is a moving average for all types of traders and investors and you should learn to use them in your activities.