Opinion: These trading strategies can make the stock market trend your ally
An orchestrated short-squeeze on GameStop and AMC Entertainment Holdings lured traders into the stock market last month for a chance to get rich. Some retail investors have made small fortunes while a few well-funded hedge funds have been destroyed. Power to the small investor. Few of us have ever seen a raid organized by retail traders, and it worked.
In fact, trendy transactions do work on occasion, but don’t confuse buying GameStop GME,
or any other targeted security with a trading strategy. As MarketWatch columnist Brett Arends wrote, “It’s gambling, not trading. ” He is right. Many traders treat the market like a lottery game. Some took extreme risks and won big. Many more, the ones you don’t hear about, have lost their fortunes.
If you’re looking for a less exciting, less risky approach that aims to build wealth over time rather than minutes, consider trend-following strategies. They aren’t as sexy as chasing dynamic actions, but they’ve worked for decades.
Being long is easier than shorting
After years of researching and testing the market, I have found that it is much easier to go long than to sell short (bet that a stock or an index will go down). Although short sellers are necessary for a healthy stock market, for retail traders and investors it is recommended to be long. This means buying individual stocks or index ETFs.
Obviously in the next bear market it will be difficult to go long, but you can still find strong stocks in strong sectors regardless of the market environment. However, in turbulent markets, trends can reverse quickly, so you need to be vigilant.
Let’s discuss some trend following strategies you can use in a hectic and unpredictable market environment.
1. Buy stocks with relative strength
Even when the market is selling, there are stocks with “relative strength” – stocks that rise while the overall market falls. Stocks with relative strength are rough diamonds.
For example, stocks with relative strength last week included Abbott Laboratories ABT,
and Blackstone Group BX,
winning as the US market declined. On January 29, when the Dow Jones Industrial Average DJIA,
slipped 620 points, down 2.03%, these values were among the winners: Gilead Sciences GILD,
and McDonald’s MCD,
Just because a stock is relatively strong doesn’t mean you should buy it. It just means that it needs to be watched and considered. You still need to do your homework before buying stocks, which involves checking technical and fundamental data.
2. Buy stocks trending upwards
On days when the market looks set to rise to open (study the futures market for clues as to the direction of the market), prepare to buy stocks on your watchlist (a list of stocks that you follow). It is easier to go long on days when the futures market indicates a higher open.
Warning: Avoid stocks that are expected to rise more than 8% or more on the open. These actions tend to change direction after a few minutes (what I call “one minute wonders”).
Following the stocks in a bull market is a simple strategy that has worked extremely well. While it is exciting to hunt the soaring wild stocks, it can easily end in disaster. This is why using a less emotional trend following strategy makes sense for many traders and investors. While you probably won’t be making a lot of money fast, as long as the market continues to rise in the long run, you can make money slowly.
Michael Sincere is the author of “Understanding Options”, Understanding Stocks “and the upcoming” Make Money Trading Options “.
Following: GameStop and AMC show why you should practice trading before playing for real money
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