Thursday, May 27, 2010

You don't have to lose money in stock market


I learned to play the stock market the hard way, by losing almost everything I have invested. I start investing at the worst time possible, in 2006 just a year before the big crash. The reason I lost so much was because I thought playing stock market was very easy, "buy low and sell high" so I didn't need to bother learning anything about. It turned out to be a big mistake, a huge one who cost me almost everything I have saved during the years. It's amazing how easy I've got sucked into doing this without giving a second thought. I am a pretty cautions type of guy, one who reads the instructions even when buying a toaster, yet I put my savings at risk without even blinking.

After burning my portfolio to the ground I start reading many books about the stock market and I realized that investing is more than buying stocks and hold them in the hope they may go higher. You need to spend a considerable amount of time in finding the right book for you, to learn about different indicators then to put what you've learned in practice. Yet learning a few basic "tricks" takes only a couple of minutes. If you buy as soon as the price moves above SMA200 (two hundred days simple moving average) and sell when it goes bellow SMA200 you are pretty much safe no matter if you are talking about 2007-2009 crash, 2000-2003 or 1929 one. A simple technical analysis trick like this not only save your portfolio from a disaster but makes you a guarantee winner no matter what. To give you some numbers, I was supposed to sell when Dow went to 13,000, re-enter the market at 8,500 and sell again a few days ago at 10,200. Some of you would say, "this is dumb, you missed the top at 14,000 and the bottom at 6,500" which is true is not a very good performance for a good trader but for a newbie is as good as one can get, and now, instead of being $80,000 short I could have an extra $20,000 in my pocket. Big difference!

Also remember that you don't know what the top and the bottom are before hand, you know them only after they already happen so the probability of selling exactly at the top and buying at the bottom is remote. However, using SMA200 as your buy and sell signals gives you a clue in real time.

Looking at 2003-2007 you may notice that market went bellow SMA200 for 4 times (red arrows) without indexes slipping into the bear market and only the 5th plunge bellow SMA200, in 2007, was the real one. So what does this mean? It means the SMA200 buy/sell signal is not perfect. If you look carefully you will notice that on those four instances you had sold and bought your stocks almost at the same price. But let say that instead of gaining 4,500 points from 8,500 in 2003 to 13,000 in 2007 you gained only 4,000 points. This is still 47% gain! This assumes you stayed long when market went above SMA200 and stayed in cash during the crash but if you went short when indexes plunged bellow SMA200 the gains would be close to 100% . What you should do is to sell when market moves bellow SMA200 no matter what because you would never know, a priori, if this plunge is going to be for real or not. I'll teach you later how to add additional filters to decrease the number of false sell signals generated by the SMA200, such as the fact that SMA200 need to point down in order to get a real sell signal, one of the reasons I don't think the current plunge is more than a correction.

This blog is not intended for people experienced in stock market or for those inexperienced but who think they are too clever to learn from somebody else. It is intended for people who just started investing in stock market or those who lost their shirt during the plunge and want to trade better from now on. Also please don't judge my English since English is not my first language judge only the content of this blog.

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Babaro

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