How I Pick Stocks (a series). Part 1: The Trend is Your Friend

Every time I buy a stock I look at the trend that it is following.  I look at the short term trend (1-5 days), the mid term trend (6m-year) and the long term trend (1 year to max).  I do this just by changing the time tab from one day, to one week, to three months, to one year, and then to the max which shows the entire chart for as long as the stock has been publicly traded. By looking at the trend it lets you get into a position and buy a stock with a better understanding of the up and downs.

This is important because stocks don’t trade in a straight line.  Stocks go up then they go down then they go up again.  Or they go down then up then down again.  Just like the emoji! LOL.  If you are a long term investor its good to know where the stock is headed long term so you don’t get caught up in the noise from the pundits or the short term reaction to current events.  If you are a short term investor it helps you know where the stock is going now so you can make money now and be on to the next trade.

Tools in a tool box

Before I got forward just know that trend following isn’t the complete analysis it is just a factor in the total analytical checklist that I will break down in this series.  Trend following is a tool in your investing tool box.  Finding the trend is not the end all but it cannot be overlooked. Each stock should be analyzed with a glance at where the stock is headed.

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As Al Pickett says “what is going up tends to continue to go up and what is going down continues to go down.   This was something I had to just embrace.  It has worked for me. I am a contrarian investor so I used to try to go against the trend.  I thought that being contrarian meant betting on a pull back or betting on a reversal in the trend. This works BUT the odds tend to not be in your favor. Investing, like life, is an odds game. The odds are that the trend will continue. The odds favor the momentum going forward as opposed to reversing.  Don’t fight it just let the market momentum carry you to wealth.

Combination of strategies 

What I like to do now is use both a short term and long term combination.  The more you do this the better you will get.  If I see a stock trading down short term but the overall trend us an upward trend I know that I found something that will pop back up.  If I find a stock that is trading up short term but the overall long term trend is down then I know its something to avoid. You determine the short term trend by looking at the one year or less chart. You find the long term trend by expanding that tab.

Time period matters

One thing to keep in mind with trading is that the trend is a time period. So if you are looking to make short term money you have to play the short term chart. If you are in it for the long haul then you follow the trend of the chart on a longer time horizon. Either way, you have to use some wisdom so you don’t freak out when your long term play turns against you and stays against you for six months. Long term things tend to play out.

How to create trend lines

You create trends lines to determine the direction that a stocks momentum is carrying it by drawing a line from top point to the next top point and from low point to the next low point.  This shows you your trend but it also gives you what is called you support and resistance lines.  These are important because it gives you a general idea for how high a stock will trade and how low it will go within the confines of the trend. It looks like this

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One of the greatest revelations is that stock investing from a value perspective not a speculation perspective mirrors real estate investing.  So just like you can track trends in stocks you can track trends in real estate. Remember that this is not all the work but it is a large part of the work. There are investors that don’t look at data they only look at trend lines and they don’t care what stock it is or what commodity or currency.  If you can get good at this aspect of investing you can do well and make money and supplement your trend spotting skills with your chart analysis and fundamental analysis. All things we will cover in this series.

If you are interested in investing with our club on either the stock or real estate side we would be happy to welcome you into the partnership.  Email membership@capitaltodd.com today to join.

Be great, invest well,

Todd Millionaire

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