INVESTING AND TRADING RULES
Many books on Trading and Investing cover these principles as
a guide to maximise your gains and minimise your risks. These simple Technical and
Fundamental Analysis rules have been summarised here to help you gain a better perspective
when investing or trading. In no specific order.
RULE 1.
Review with caution any over bought stock. In a
chart, you may choose to use an indicator from the Oscillator family, say the Relative
Strength Index. If a stock is close to, or, over an Index reading of 70, it may be over
bought. If the stock is close to, or, under 30 it is potentially over sold. When looking
to select stocks, it is often better to buy stocks that have recently been oversold but
are now working higher (as evidence by the indicator reading moving from an oversold Index
level of below 30 to above 30.
RULE 2.
Buy into a positive trend, as the saying goes
‘the trend is your friend’. Use a moving average, e.g. 30 days. Ensure the stock
price is above the 30 day moving average. Be on alert when the stock starts to break below
the 30 day average.
RULE 3.
Implement and stick to an ‘Investment /
Trading Strategy’. Never take a position in a stock without pre-planning an exit
strategy. That is, have a plan to sell at ‘X’ profit, a plan to sell at
‘X’ loss ( known as a stop loss, or a trailing stop loss which follows a
positive trend). And lastly, a plan to move out of that stock in ‘X’ time if it
is not meeting your criteria immediately. You will define X depending on your tolerance to
risk and your personal objectives. 'Plan a Trade, Trade a Plan'.
RULE 4.
Look at strong historical (liquidity) volume
levels, that is: stocks with consistent high volumes, and look for stocks where the volume
is trending up in line with the 30 day moving average of price.
RULE 5.
Choose companies which are fundamentally and
financially healthy. Look for;
- Low Price Earnings Ratio’s, typically less than 25 or
less than their industry.
- Find companies with good Earnings Growth
- Should have solid consistent profits and revenue growth
- Dividends Paid where possible.
RULE 6.
Review the Industry the stock belongs to before
making an investment decision.
- Is the Industry ‘Out of Favour’?
- Has the industry experienced growth?
- What is happening to other stocks in the same Industry?
These basic rules are some of the foundations to Technical
and Fundamental Analysis. By following these rules you can confidently review the market,
find opportunities which meet your personal objectives and implement a strategy to
maximise gains and minimise risk.
This information is not provided as recommendations, personal objectives differ between
individuals, this information provides a guide to implementing Technical and Fundamental
Analysis criteria.
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