Investing in stocks is a lot like fishing. You need to be skilled. You need to be consistent. Above all, you need to pick the right time to get involved. With that in mind, we’re going to look at how you can tell when it’s time to take a position or invest in a stock.
Identifying Trends in the Market
Trends can, broadly speaking, be classified into three types:
Short-term, which could be regarded as occurring over a period of up to a day or two;
Intermediate-term, which for the average investor could be a few weeks;
Long-term, which could take place over months or even years, depending on the market.
If you are serious about investing, following market movements over these time frames should be your general practice. With a good trading platform it is possible to keep track of current and historic movements and to buy or sell when necessary. But how do you know when to act?
Taking Advantage of Trends
Everything depends on your own strategy, but generally, there are rules which can be followed. Predictors to look out for include:
One of the most basic rules is that if you are invested in an uptrend, for example, you should be on the lookout for any weakness in the tendency of the stock to rise. One way to do this is by subscribing to the mathematical model of mean reversion, which predicts that stocks should, over time, converge on an average value. However, adherents of this theory concede that this phenomenon only occurs over the extremely long term.
This involves following the behaviour of other buyers – rather than the actions of the company which issued the shares – and requires you to study their investment patterns. You could ask yourself, is the stock currently popular with investors? If they are still buying, then the market will continue to rise. If you discover that investors are unloading their shares, then perhaps it is time for you to act too.
Certain investors favour a strategy that doesn’t look at the past or future at all. They believe that each stock price is a martingale, which is a mathematical concept which states that looking at an individual number is the best way to predict the next number. So, by following this theory, investors should focus on managing risk rather than studying past trends, because a stock’s future price is most likely going to just be a small increase (or decrease) of the current price.
There are, naturally, many other ways of identifying trends. The most important thing, perhaps, is to be aware that this should be a key part of an investment strategy.