These are the 2 scenarios you will fall into:
- “I invested into this stock recently because it has been performing well recently on its price.”
- “I invested into this stock recently because its price has been dropping for months and I think it is at a discounted level.”
The role of Technical Analysis is to serve as a tool for an investor/trader to understand the past and current price movement of their stocks. But how do we know if the stock that we invested into currently are the RIGHT STOCKS to hold?
- If you had invested into this stock since January Year 2015 you will be making losses from this stock for a total period of 1 year.
- If you had invested into this stock since January Year 2016 instead you will be making profits from this stock over the past 4 months.
Being an investor/trader, am I wrong to say the moment when I invested into a stock I hope its price will be sky rocketing high over the next couple of weeks or months? I’m certain that you have the right answer in your mind.
Hence the usage of Technical Analysis need not be as complicated as how you been told or read from the text book. Keep it simple by first knowing how to identify the RIGHT direction of the stock prices.
- If you had invested into this stock since Year 2013 you will be making a huge losses from this stock.
- If you had invested into this stock since Year 2016 you will be make profits from this stock.
Again the usage of Technical Analysis is to have the ability to identify the Big Price Trend Reversal on the stock prices. Although the prices of the stock above have been trending down since Year 2013, it does not trend down on a straight line but with multiple ups and downs on its prices. Hence I always conclude that a downtrend stock is only suitable for short term trading activities by trading the small price rebounds. This helps to prevent yourself from investing into a stock for the sake of being cheap as you may ended up a long term investor with losses.
Apply EMA200days onto your stock’s chart
As you can see from the examples above I’ve added a simple Exponential Moving Averages(EMA) with 200 days time period onto the stock’s chart. Purpose?
- It helps me to identify the past and current trend of the stock’s price.
- It allows me to further study whether I should hold onto this stock in the short, medium or long term period.
What it doesn’t help me?
- The EMA200days does not serve as an entry or exit strategy to us as an investor/trader. It is just one strategy that allows us to define the Market Trend.
“I invested into this stock recently because its price has been dropping for months and I think it is at a discounted level.”
“What goes up will eventually goes down and vice versa.” sounds to be too well known to all the investor/trader but is that how we reacted when it comes to picking the RIGHT STOCKS in our portfolio? Stock prices being cheap does not mean its a good bargain buy unless it is moving on the RIGHT direction am I right?
Unless you have declared yourself to be a long term investor for as long as 5 years then YES technical analysis will not be something that will attract nor help you in your portfolio.
To get to understand more on the usage of EMA200days indicator please visit the link below:
(10 years Position Equities Trader, Founder of trendfollowingmalaysia.com)