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In today’s episode, you’ll discover proven stock trading techniques to beat the markets. These are the stuff that took me years to figure out and I’m sharing it with you, for free.
So listen to it right now…
Resources
The 200 Day Moving Average Strategy Guide
Transcript
Hey, hey, what’s up my friend?
In today’s episode, I want to share with you some of the stock market’s behaviour.
Most traders are not aware of this because they think all markets are the same.
But hey, that’s not true because different markets have different characteristics.
Let me share with you a few techniques that you can use to trade the stock markets based on its own behaviour.
1. Buy into strength
You want to buy strength when it comes to stock trading.
Because academic research and even my backtesting have shown that stocks that have done well recently or have moved the most over the last 12 months will tend to continue to outperform the market in the near future.
So you want to buy strength in stock trading. In other words, you want to buy high and sell higher.
2. Use a trend filter
In stock trading, you want to also use a trend filter.
Because the stock market has an index that tracks how the overall stock market is doing.
For example, S&P500 tracks the largest 500 companies in the US.
So if the S&P500 is in a booming market, you can be sure that most stocks will tend to be in a booming market and be in an uptrend.
But if the S&P500 is in a downtrend, then most stocks will go down along with it.
How can you use this in your trading?
You can use this as a trend filter.
For example, if the S&P500 is above the 200-day moving average, then you can take it as a green light. You have permission to buy stocks since the overall market is in an uptrend.
But if the S&P500 is below the 200-day moving average, it means the stock market isn’t doing too well so you don’t want to be buying stocks. You would rather hold on to cash.
So this is a simple trend filter to know if you should be buying stocks or to hold onto cash.
3. Identify relative strength
You can use relative strength in stock trading because it’s a technique to help you identify the strongest stocks to trade.
For example, let’s say the S&P500 did a pullback of 20% and you notice that this particular stock, let’s call it stock ‘Orange’ didn’t really pull back.
The S&P500 pulled back 20% but stock ‘Orange’ only pulled back 1% or 2% around breakeven.
This is a sign of strength and this tells you that the stock ‘Orange’ is strong.
Because when the index makes a pullback, this stock ‘Orange’ still hovered at the initial price that it was at prior to the index making a pullback.
So you can expect that if the index recovers, then this particular stock ‘Orange’ will have a good chance that it will breakout of the highs first and move even further higher than the S&P500.
Because in terms of relative strength, this stock ‘Orange’ is stronger than the index.
So you can use relative strength in your trading to identify the stronger stocks to trade.
When you’re using relative strength, the easiest way is to watch when a market does a pullback, which stocks are the ones that hold up well or continues to consolidate or break out to new highs.
Those are stocks that you want to pay attention to as they’ll continue to outperform the market in the near future.
4. Avoid shorting the markets
And finally, when it comes to stock trading, avoid shorting the markets.
Here’s why…
The stock market is in a long-term uptrend
If you look at the stock markets from their inception until now, almost all the stock markets are in a long-term uptrend.
Those that are no longer in a long-term uptrend are probably delisted.
Generally, stocks go up in the long run.
So when you’re trying to short stocks, you’re putting yourself at a disadvantage.
The pullback in a downtrend is deep and fast
Stocks behave differently in a downturn compared to in an uptrend.
When stocks are collapsing during a recession, the price can drop day after day with huge bearish candles.
But at the same time, there’s something called a “dead cat bounce”, where you see a strong rally after a strong collapse.
For example, the 2008 to 2009 financial crisis, you can see that V-shaped bottom.
Stocks exhibit this behaviour in a downturn in which the price can drop very fast, but at the same time, the pullback is equally sharp towards the opposite direction.
So when you’re shorting stocks and you hold onto your trades too long, you’ll realize that all your open profits are quickly eroded.
For inexperienced traders, I recommend that you stay away from shorting stocks.
If you want to short stocks, do it only if you’re experienced or you know what to expect when you’re shorting the market.
For new traders, avoid shorting stocks because:
- The overall market is in a long-term uptrend
- The pullback can happen quickly
If you’re not fast enough to react, you’ll lose your profits very quickly as well.
These are the 4 techniques I want to share with you about the behaviour of the stock markets and hopefully, you can use it for your trading.
With that said, I’ve come towards the end of today’s session and I will talk to you soon.