If you have made it this far, congratulations! You are ready to hear the plan. Buckle up, and read it more than once.
Ok, so there are somewhere around 11,000 stocks traded in US Exchanges. Every one of those stocks has a theoretical infinite number of moving averages associated with it. My analysis is concerned with the 20 and 50 day moving averages. As a reminder, the moving average is simply an imaginary line drawn at the approximate midpoint of the market price movement over the past 20 or 50 days.
Here is the bottom line up front:
- Mean reversion theory suggests that stocks will revert toward their mean, in our case the 20 or 50 day moving average.
- First, I quantify the percentage of stocks that are above their 20 and 50 day moving averages.
- When the percentage of stocks that are above their 20/50 day averages is abnormally low, I enter a bullish trade.
- When the percentage of stocks that are above their 20/50 day averages is abnormally high, I set a trailing stop.
My market analysis is the value of this site. I will post my market updates in the page titled "Current Market Analysis." That is where you, the active index trader, take the ball and run. Enter your trades as your risk appetite allows. In my analysis I will provide 3 pieces of critical information:
- Current status of the percentage of stocks above their 50 and 20 day moving average.
- My analysis of current medium-term market bias (Bullish, Neutral, or Bearish.)
- My personal trade setup.
Did you get that? Read it again.
Not too bad, is it?
In my experience this leads to trades that last between 3 weeks and 2 months. I let the market be my guide on duration and price. I do not set price goals. I do not set time horizons. I simply flow with the market and let it give me what she wants to give.
Is it ever wrong? Absolutely. But my market analysis leads to far more wins than losses as long as the basic trading structure is followed.
The Holy Grail of stock investing does not exist. If it did, there would be no market. Knowing that, there are a few Darwinian axioms we must learn to survive the trading gauntlet:
- Pigs get fat, hogs get slaughtered. - The times we lose the biggest are the times we get greedy and push the profits to gain one or two extra percent.
- Don't look back - The greatest mistake a trader can make is to revisit a trade and "if-only" it. (You know, "If only I had stayed in I would have made more money.") You will do nothing but trick your brain into thinking that your established methods are flawed. It generally leads to #1 above.
- Patience above all - If you miss an opportunity, you missed it. Don't jump in after the predictable move has taken place. Don't force yourself into a trade with an unknown likelihood of success. You'll only stress yourself out.
- Solace in the long term - Take comfort in the following:
- Your investment horizon is long term, even though your trading style is medium term.
- You are trading a diversified instrument.
- You are consistently entering trades at a very favorable point.
- You are earning 2 - 3 times the market average with each trade.
- You can miss a trade or two and still beat the benchmark average for the year.
- You are minimizing trade costs.
- You are protected from most market corrections or crashes.*
*There is no true protection from the most extreme market crashes. Trailing stops may lead to extreme losses in worst case scenarios.