If you are concerned about managing risk, about safe profitable investing, and maintaining your cash base through market ups and downs my Three Step plan to safe profitable investing will help you achieve your investing goals.
The greater the confidence you have in your investment selections the more likely your choices will be winners.
The key to success is to verify that the mutual fund, ETF, or stock investment you are about to make actually has a great probability of going up and making you money.
I like to follow a 3-Step plan when making my investment decisions. If an ETF doesn’t pass all three steps I rarely buy it. I say rarely because there is always an exception to every rule, but an exception is just that,, an exception, a very rare deviation from the norm.
My 3-Step Plan involves:
- Analyzing my group for the best ticker symbols.
- Verifying that the group strategy performance is positive.
- Verifying that the selected tickers show positive indicators.
I have followed these steps for many years, and they have kept me from making some bad decisions, some emotional decisions, and most importantly, from losing a substantial amount of money.
Analyzing is the process of evaluating groups of mutual funds, ETF’s, or stocks according to a specific technical analysis. I normally use Alpha (a type of relative strength analysis that compares the momentum of one tickers to other ticker and a benchmark), but you can use any type of analysis such as:
- Relative Strength Momentum
(note: you can also add a Standard Deviation to any of these methods)
Once your investment software has found the best ticker symbol to buy, based on your analysis, you should verify that the symbol chosen is, in fact, ranked better than the index or benchmark you are using for comparison purposes. If the symbol is not performing better than the benchmark then it is likely going to go down and you will lose money-so don’t buy it. I also like to a see that the particular symbol is ranked near or at the top of the list of all the symbols in that particular group of stocks, mutual funds, ETF’s.
Verifying the strategy is important to make sure that the overall strategy with its buy analysis and rules for selling are profitable. Strategies can be profitable some of the time depending on the overall market trends, but they can also be non-productive at other times; this is normal.
I generally use two charts to verify the effectiveness of my strategies. You can make your own choices, but I like to use:
- Moving Average
- Full Stochastic
In the moving average chart; I want to see that the price line for the recommended symbol is trending above both the slow and the fast moving averages. This would be an indication to buy or a hold signal.
If the price line falls between the lines, it becomes a maybe or a watch me signal, and if the price line is below both of the moving average lines, that is a don’t buy signal.
Reading the full stochastic chart is a bit trickier than using the moving average chart.
In the full stochastic chart; I look to see if the stochastic line is above the trigger line. When this occurs in the lower fifth of the chart, it is a buy signal;
When the line is above the upper fifth of the chart, it is a hold and possible buy signal. When the stochastic line cuts down thru the trigger line in the upper fifth of the chart it is a sell or don’t buy signal.
The best buy signal is when both the charts (Moving Average and Full Stochastic) are showing buy signals, remember occasionally one chart will say buy while the other is ‘watch me’ or ‘maybe’. Note: I may buy in this situation depending on the results of step three (below) when the selected ticker shows positive indicators.
Verifying the ticker is critical to be sure its movement is positive. I use the same chart types for the particular selected ticker as I did for the strategy: moving average and full stochastic.
With the ticker, I want to see a buy signal in the charts. Sometimes between four charts, I may have just two or three buy signals. Four buy signals is best, but if three show buy signals, and the fourth is heading toward a buy signal it is usually safe to go with that selection.
Implementing this 3-step plan sounds more complicated that it actually is. I can go through the entire process for a dozen strategies in 15 minutes or less, and actually, there is investment software available now that automates this process and give you the results in just a few minutes.
If you are concerned about managing risk, about safe investing, and maintaining your cash base through market ups and downs, this Three-step plan will help you achieve your investment goals.
Investing Made Easy – Your road map for safe profitable investing in less than 30 minutes a week. By Raymond M.F. Dominick