The Trend is your Friend
I decided to use the word “Mantra” in the title because it means a commonly repeated word or phrase and the trading phrase “The Trend is your Friend” is often repeated among most stock traders if they use charts or technical analysis.
The more time you spend trading and studying the markets, the more you realize how essential following the trend is to saving yourself a lot of agony and grief.
So many new investors get started in investing hearing a story about a company they like or they hear a TV guru(like the guy that screams stock picks nightly on CNBC) or actually follow tips from anonymous chatrooms touting the latest stock with some hot new product or huge earnings coming up that that the market isn’t pricing into the stock yet.
There are hundreds of former market darlings that were “Must Own” stocks for the long run and ended up being dogs. Honestly if you are buying for the long run then buy an index fund because if you think buying and holding a large “safe” stock will outperform the market then you will usually be wrong.
If you decide that you still want to own individual stocks and are a short term or long term investor then you have to at least look at a stock chart to give you perspective on where the stock is in it’s cycle.
Sure some big investors like Warren Buffet buy without looking at charts but individual investors need to realize that they cant afford to keep averaging down on a stock because it is cheap like Warren Buffet does.
Individual investors are exposing themselves to huge risk averaging down and putting more good money into losing positions. Sure you might be lucky averaging down on a bellweather name like Walmart(WMT) that might move higher but what if you decided to buy another “safe” bellweather name instead like Citigroup or AIG or Fannie Mae……because you liked the dividends and what is safer than banks or insurance…..right…….oops.
If you had a basic understanding of charts then you could buy cheap stocks as they start an uptrend and volume supporting more buyers than sellers. You don’t have to use charts to daytrade. You could use monthly or weekly charts. You could use a basic moving average like the 200day average and sell when it turns down or when the stock breaks below the 2o0day,etc………Charts don’t need to be complicated but they give you an overview of a stock without the daily noise of talking heads or pundits……..
In fact it has been proven over and over and over that most mutual funds underperform the market indexes in the long run and if you bought the top ranked mutual funds like Morningstar top funds you would underperform the lower ranked funds…….so if the pros aren’t good at picking stocks then why do you think you can. Instead just follow the trend, buy when stock goes up and sell when it’s not……OBVIOUSLY INVESTING AND CHART READING IS MORE COMPLICATED THAN THAT BUT YOU GET THE IDEA.
Summary – Don’t fight the trend and avoid averaging down into individual stocks as they can always go lower. Always remember that the market doesn’t care where you bought the stock so always cut your losses and move on.