Basic investor concepts for beginner to intermediate term level investors.

Today we wanted to point out some very basic ideas for beginner to intermediate term level investors.

Confirmation & Robust:

If you have been reading our posts for the last year, you have heard us discuss the concept of confirmation & robustness.  This is important for new investors to understand as many gravitate towards shorter term trading. The biggest issue with short term trading 1 day to 2 weeks is the level of confirmation technically provides weak signals.  The shorter the ratio of a moving average (ratio as in 1 in 5 or 10 & 50 days) or length of the moving average, the less powerful the confirmation of the trend.  Remember, the longer term trend is much more powerful for future price appreciation than shorter term indicators.

Many new investors try and discover that wholly grail in high probability breakouts or high probability setups.  Don’t waste your time looking, stick to the basics and realize short term trading is a game of odds and you can only win with dedicated risk management.  We have back-tested every signal basic indicator and the probabilities over a longer time frame.  Some are slightly better than others, but the real key is to make sure you use sell discipline for that specific trade objective.

KEEP it SIMPLE:

So let’s look at a short term trade set up, personally we are more partial to long term trend following.  However, we know many investors have a fast trigger finger as many investors feel this bull cycle is coming to an end.

1. Event Driven Trades with Technical Setup:  This is by far our favorite short term trading setups because the confirmation is better.  Examples are:

  • A change in monetary policy > interest rate sensitive sectors technical break or break out utilizing short term moving average ratios like 13 EMA / 48 EMA,
  • Earnings > always wait for 1 or 2 days for price confirmation after earnings coupled with short term price confirmation 13 EMA / 48 EMA, ATR Trailing Buy, or close above a longer term moving average 200 days.
  • Structural change at a company (new products or reorganization, restructuring) > coupled with short term price confirmation 13 EMA / 48 EMA, ATR Trailing Buy, or close above a longer term moving average 200 days.
  • Structural change within the sector (government intervention, new technological advancements for sector structural shifts)
  • Remember, whatever technical ratio that brought you into that trade, you must use to exit it, other wise you will compromise your rules and discipline.  Example, if you used a 13 EMA crossing above the 48 EMA to go long, then sell if the 13 EMA crosses below.  While the 13 / 48 cross over is a ratio for a little bit longer than 2 weeks, its a good one to watch for even short term trades.  Also, the MACD crossover can be used for swing trades, although the MACD is a terrible tool for intermediate to longer term trend following and provides too much noise.