Learn to Trade -- It Will Save Your Investments

You have to learn to embrace the chaos of the markets.

That means absorbing some technical analysis to get a handle on how the markets really operate.

But don’t worry, it’s not nearly as complicated or as intimidating as it might seem. You’ll see what I mean in a minute when I walk you through it. And I promise, grasping the basics of technical analysis will make you a much better trader. That means you’ll be able to avoid the deadly landmines so many unsuspecting traders step on. It also means you’ll make a lot more money.

Look, I know many folks are spooked by “technical analysis.” It sounds way too technical for the average trader. They think you need a PhD or something to do it. You don’t. Others see technical analysis as a bunch of hocus-pocus that doesn’t really explain anything. They know nothing about the principles of technical analysis, so they quickly dismiss it as witchcraft.

They’re wrong.

Even if you consider yourself a fundamentals-driven investor, you need to incorporate some technical analysis into your strategies. But don’t worry, meshing technicals with your fundamental ideas is easy and painless. And once you do, I promise you’ll begin to rake in the profits that have proved so elusive. You’ll also begin feeling much more confident in your investment choices once you master some small technical tricks.

To help you get started, I’ve put together three ideas you can use the next time you buy (or sell) an investment. All of these tips take less than five minutes to implement, so there’s no excuse for you to ignore them.

1. Spotting Technical “Value Traps”

Everyone likes a deal. So it’s no surprise that fundamental investors love stocks that are cheap relative to earnings, sales or book value. After all, why wouldn’t you want to buy a cheap, out-of-favor stock and hold it until its true value is realized?

In theory, it sounds like a can’t-miss plan. But as you probably know by now, the realities of the market can easily derail your plans. Instead of buying any old “cheap” stock you come across, you need to exclude any names that might trap you in a losing position.

Here’s how you do it: First, avoid buying stocks at or near 52-week lows. I know it might be tempting. After all, the stock is cheaper than it’s been all year. The typical investor logic here is that shares shouldn’t trade much lower.

But they can. And they probably will. Just because a stock hits a new low does not mean that it has found a bottom. Stocks move in trends — up, down or sideways. If a stock is moving lower, you must assume it will continue to do so until the price tells you otherwise. Even as an investor, you should never buy into a downtrending stock. Leave your beliefs out of it. Stick to the rules.

OK, let’s say you’ve done your research. You like a company. You think its shares are cheap, but the stock is locked in a downtrend. Instead of buying, place the stock on your watch list and keep an eye on its chart. If and when the price appears to hit a floor and move higher, you can begin to plan your entry.

2. Buying Support

When you’re not bottom-fishing, you might come across a potential investment that’s trending higher. All that means is the stock is displaying a series of higher highs and higher lows on a daily or weekly chart.

In the case of an uptrending stock, you will want to time your entry to coincide with its support levels. Naturally, as a longer-term investor, you want the best price possible — even when you’re buying a stock that’s moving higher.

Use moving averages or draw trend lines to determine where you should be a buyer, like this:

Buying Support

In this chart, I’ve drawn a simple trend line. The arrows indicate where you should look to buy the stock. You don’t have to be too precise here. Just construct a line that best fits your particular chart. From there, you can use your judgment to determine when to plan your initial buy — or when to add to an existing position. It’s not rocket science, and it can help you make the right decision – or avoid making a bad one. Just don’t buy if the trend falls below the line.

3. Selling Strength

Of course, you also want to sell your position for the best possible price. Fortunately, technical analysis can help you pinpoint where shares might be running out of steam. So if you’re holding an investment you believe has realized its potential value, you can use resistance lines to plan your sells.

Here’s the exact same price chart from above. Only this time, I’ve added different annotations:

Selling Strength

By drawing a resistance line above this uptrending stock, you can see where share price runs out of steam. The arrows show where price touches or briefly crosses resistance. Again, your trend line doesn’t have to be exact. You’re simply using it as a general guide to help sell shares close to near-term highs.

Whether you’re new to the markets or a seasoned veteran, you should apply these time-tested trading techniques to your investments. They can make you a lot of money.

Sincerely,

Greg Guenthner
for The Daily Reckoning

P.S It’s not rocket science. If you want to cash in on the biggest profits this market has to offer, sign up for my Rude Awakening e-letter, right here. Stop missing out. Click here now to sign up for FREE.

PSS: No Rude tomorrow! I’ll be back with some fresh ideas bright and early Monday morning!

[Ed. Note: Send your feedback here: rude@agorafinancial.com – and follow me on Twitter: @GregGuenthner]

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