Risk Management: Why we have more chances of making money than the ‘Professionals’ in the City

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In a previous article we discussed how to enter the market using Moving Averages, using AAPL as an example.

This time round, we explore the 5 reasons we have more chances of making money than even the professionals in the City.

Making money investing in this way is simple. But that doesn’t mean it is easy. You have to learn what to do. Then you need to do what you have learned. Simple, but not easy.

Often we find that the challenge starts with our own mindset around ‘the markets’. We say things to ourselves like “It is too risky”, “I could lose everything”, “the markets are manipulated”, “the professionals know best, I should invest with them”.

In reality there are 3 market movements not 1.

This month we will discuss how to use the market direction in your favour. The market will always tell you what to do, so don’t try to second guess it – it just won’t work!

For example, if a market is going sideways, then it has no clear market direction. It goes up & down, up & down, but the net result is that it just goes sideways. If you were to buy and hold a sideways moving stock, it wouldn’t work very well as you are likely to end up near the same price you bought at.

We try to time the market by buying when it is near its lows and selling near its highs. Where would we sell short? We would try to time the market and sell short near the top and buy back near its lows.

But we have already covered this in previous articles. What we want to do now, is to explore the other market movements. For example, a stock could trend up with higher highs and higher lows. For it to be classes as ‘trending’ it means that it continues up over a period of time. Or a stock could trend down with lowers highs and lower lows. This means that it continues down over a period of time. So let’s take each in turn.

If a stock is trending up, like the chart below, what can we do?

If you said we could buy at the bottom of the support line and sell at the top, then you would be right. The question is though, if the trend is up, where would we try to make money going down by selling short (which we talked about last month)?

What would you say?

Near the top?

The answer is you wouldn’t.

When the trend is up, we do not sell short. We only go with the trend, never against the trend. Fighting the trend is like standing on a railway line with your hands up in defiance, telling the oncoming train to stop and thinking you can stop it with your sheer will power. The train is much bigger and faster than you and it will squash you like a bug. It is best to quickly jump to the side, and instead of going against the trend of the train, to jump on the train in the way it is moving.

In the same way you have more chances of making money when a stock is moving up to go with the upward trend and buy into it. The highs are higher and the lows are higher, so we have to assume that once a stock is trending, it is more likely to continue in that direction than to turn around and move in the other direction.

Let’s take a look at the chart below. It is clearly trending down. Where would you sell short?

If you said you would sell short near the top of the support line and buy back near the bottom, then that would be correct.

But where would you try to buy in the hope of making money as it goes up?

Where would your entry point be?

Would you say near the bottom?

Go on, take a guess before reading on …

The answer is, you wouldn’t. Remember we only go with the trend, we don’t go against the trend. Another analogy is a bus. If you were going East, you wouldn’t jump on the bus going West in the hope that it will eventually turn around and head back East? You would cross the road and wait for the bus going East, as it will likely get you there faster.

In the same way, you have more chances of making money when a stock is moving down to go with the downward trend and sell into it. The lows are lower and the highs are lower, so when a stock is trending it is more likely to continue in that direction than to turn around and move in the other direction.

Here’s what else is interesting: when you see an upward moving stock, it is likely to bounce off a support line and move up faster than a sideways moving stock for example. This is because everyone else who is looking to trade that stock sees the same thing as you. And when the stock is ready, they are waiting to jump in, driving the price back up.

Another reason to always go with the trend – if the stock is going up, we buy and never ever Sell Short.

But when we see a stock trending lower, we can make money even faster – the reason is that when stocks start to go down, people tend to panic and start selling. Which in turn leads to other people selling and the prices start moving even faster?

Therefore, we always go with the trend and if the stock goes down, we sell short and never ever buy.

Summary:

When the stock is going:

1. Sideways, we can buy and the bottom and sell at the top; We can sell short at the top and buy at the bottom because there is no clear trend either up or down
2. Up, we can buy at the bottom and sell at the top but we cannot sell short at the top and buy back at the bottom because that is going against the trend.
3. Down, we can sell short at the top and buy back at the bottom but we cannot buy at the bottom in the hope it will go back up because that is going against the trend.

Remember that the Trend is your Friend and you will dramatically increase the chances of making money.

In fact, here at Investment Mastery we say, “The Trend is Your Friend until the Bend at the End.” Very true and we will discuss what that means in next month’s article.

In these times it is a MUST for you to learn more about what trading and investing in stocks, commodities and precious metals has to offer. We are having a series of 1 day events where we go through the strategies so you can take control of your own finances. But first, why not go ahead and download your FREE STRATEGY REPORT:

www.investment-mastery.com/wealthwatch

Until next time

Marcus

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