How to Buy Stocks in a Difficult Time
You’ve been watching the market sell off and now you think it’s a good time to buy stocks. However, before you do that I have a few questions to ask. Do you have a methodology that is proven historically to work? Do you have a money management plan for your trades? Do you know the area you will cut your loss if you are wrong?
If you can not answer all three of these questions with a yes, then you should not buy the stock or stocks you are thinking of purchasing. Why? Because if you study what the best traders now and then do you will see that not one of them went blindly into a stock simply because they “knew it was going up.”
To make money in the stock market you have to have a solid methodology, know how to properly manage your money both in and out of trades, and you must have an area that you will sell your stock, no matter what, if you are wrong and it moves against you.
The methodology I use to purchase stocks is the same method that most of the greatest traders of our lifetime have done. Trend following. Rather you go back to Jesse Livermore, Richard Wyckoff, and Nic Darvas or you look at William O’Neil, Michael Covel, and Ed Seykota of now, you will see that this methodology when done correctly can make you very wealthy.
The first thing you must look at before you buy a stock is the overall market. How is the market acting? Is it in an uptrend? A downtrend? Mixed? You need to know this because 130 years of stock market data shows that 3 out of 4 stocks follow the overall trend of the market. Buying a stock in a stock market going nowhere or a market that is in a downtrend, like we are in now, is just not smart. It’s called gambling, when you do that. The odds are not in your favor.
So the first rule on how to buy stocks is to make sure the market is in an overall uptrend. That is the #1 most important thing to consider before you ever buy a stock.
The second most important thing to consider before buying stocks is to make sure you are dealing with quality. Why do so many new investors want to buy penny or $1 stocks? It is something I will never understand. Having 100 shares of a $1 stock is no different than having 1 share in a $100 stock. Is it because you only have one share that bothers you? Well, it shouldn’t. Would you rather have one Mercedes Benz or 100 mopeds? I’ll take the Benz, thank you very much.
Stocks that are higher priced are priced that way for a reason. Cheap stocks are priced that way for a reason also. You get what you pay for. Higher priced merchandise normally comes with some strong EPS and sales numbers and that is the most important factor when looking for explosive stocks that turn average investors into rich investors. Just take a look at MSFT, CSCO, INTC in the 90s, EBAY, YHOO, QCOM of the 00s, and NFLX, PCLN, AAPL, HANS of today.
None of these stocks were ever “cheap” and on a P/E basis they were always expensive. However, you can look for yourself at the runs from the lows to the highs on a stock price chart and tell me how important it was that they were never “cheap.” What really matters is EPS and sales growth. The growth in those numbers is what leads to growth in your brokerage account numbers.
The third most important thing on how to buy stocks is the technicals. Sorry everyone, TA is not voodoo. It is to most that are so closed minded and ignorant that it doesn’t even matter what their opinions are. But to those of us that live in reality and have watched it work our entire life and seen it work the entire time previous to our current life, we know it works when you know what you are doing.
How to invest, this takes experience. Learning technical analysis is not easy and time reading books and studying the best traders will be necessary. However, once that “ah ha!” moment arrives and you begin to see the patterns work for yourself and have done the necessary background research to give you confidence in those patterns, you will see for yourself the folly in those that shun TA as a freakshow side project.
There is no right way or wrong way to trade stocks. The only right way is the I’m-making-money way. If you are making money consistently year in and year out using your methodology, then it is the right way. However, if your “right way” has you losing money, then I hate to tell you this but you are trading the wrong way. My way is the right way for me and my trading accounts agree with this analysis.
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