In this article, I will show you a simple market timing strategy that works. It incorporates all the knowledge in Chapter 1 and Chapter 2. If you haven't gone through these chapters, I suggest that you go through them at least once. They lay the solid foundation for this simple market timing strategy.
There are 2 components when it comes to market timing:
When you combine all three, you will have a very powerful system that will keep you on the right side of the market 75% of the time.
In order to know whether you should buy or sell or short a stock, you need to first determine the stage the stock is in and the trend of the stock.
If you are looking for a stock to buy, you should find:
The chart above shows the daily chart of AAPL. The correct time to buy the stock is when AAPL begins a new Stage 2 or uptrend. A new uptrend begins when the stock makes a higher high and higher low. A stock is also considered to be in an uptrend when it is above its rising 20,50 and 200 MA. You can see how AAPL satisfies all the criteria. That is why it rose rapidly.
After you have found a stock that is in a Stage 2 and in an uptrend, you need to have a look at the general market. We use the S&P 500 to represent the general market. It is important to look at the SPY because 3 out of 4 stocks follow the direction of the general market.
Ideally you only want to buy stocks when the S&P 500 is:
In the chart above, I have highlighted two areas. The red one represent the time period where it was not ideal to buy stocks. That's because SPY was in a stage 4 downtrend and it is below its 20 and 50 MA. I made it red because if you bought stocks during that time, odds are you are going to lose money. Look at how AAPL drifted sideways and collapsed during that period.
The green area represents the time period where it is ideal to buy stocks. The SPY has started a new stage 2 uptrend and it is above its rising 20, 50 and 200 MA. Green represents money and if you have bought stocks during that time, high odds you will make money. Notice how AAPL rose and made new highs during that period.
In order to save yourself some money and have better and more precise entry, you need to look at a lower time frame. Once you have spotted your stock candidate using the daily charts, you need to look at the 60 min chart of SPY and the 60 min chart of your stock.
I have learnt to my cost the dangers of buying a stock for swing trading when it is below its 60 min 20 MA. Even if the stock is above the 20 MA but the SPY is below its 60 min 20MA, the odds of the stock not working out well increases.
The chart above shows the 60 min chart of SPY. Whenever SPY is above its 60 min 20 MA, it is alright to buy stocks. When it is below its 60 min 20 MA, its best to avoid buying stocks. Since 3 out of 4 stocks follow the direction of the general market, it will be wise for you to follow this rule.
The chart above shows the 60 min chart of NVDA. You can see how dangerous it is to buy NVDA when it is below its 60 min 20 MA. It is much safer to buy this stock when it is above its 60 min 20 MA.
What you have learned just now is a simple method to buy stocks when everything is lining up well. The summary is, you only buy stocks when:
When you have all this in perfect alignment, the chances of you being successful will increase dramatically. Remember, this criteria does not only work for buying stocks. You can apply it to shorting stocks as well. Just reverse the criterias. Use your imagination!
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