Do you know the rule of winning equity investment? You will after you read this article.
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Equity Investment – 3 Rules for Winning Equity Investment
Rule 1 – Pay Attention to Volume
Most people look only at price when they plan their equity investments. That’s the focus of most news reports too. But we have data about volume as well as price.
Volume is the number of shares traded. Ignore volume at your peril. The volume shows how much money is flowing in or out of an equity investment.
- The higher the volume, the more money behind a price move.
- Unusual high volume means traders expect a new trend.
- Unusual high volume and rising prices are bullish.
- Unusual high volume and falling price are bearish.
- A sudden volume spike may mean insiders or funds are trading.
- Insider and fund trades may signal future price moves.
- Volume rises when traders get emotional.
- Price surges and panics have huge volumes.
- Volume grows before a big price move.
- Volume falls after a big price move when the emotional crowd is done buying or selling.
- Low volume price moves say little about the trend. Time to sit and wait.
So never buy on price alone. Let volume confirm your ideas about price direction.
Rule 2 – “Buy the Rumor, Sell the Fact”
This old Wall Street saying tells us how markets price your equity investments. It’s all about what people expect. Traders buy when they expect good news. That drives prices up.
- Any expected good news can do it –
- About a company, an industry, the market, the national economy, the US Dollar, etc.
- Traders look at the future to decide what to buy now.
- They want to buy ahead of the good news.
- When the good news breaks, prices are already up. The good news is “priced in.”
- That’s when pros sell – because there’s no more upside.
- The public is amazed when prices fall after such good news.
This doesn’t work as well with bad news.
- Bad news is often a surprise.
- Prices may fall too fast for traders to adjust when bad news breaks.
The price of your equity investments is a look 3 – 6 months into the future. So buy when prices drift up because of expected good news. Be ready to sell when the news arrives.
Rule 3 – Buy More When the Market Proves You Right
Traders buy when they expect their equity investments to go up. Traders also buy when prices do go up. Big difference! Smart traders know in advance the most they’ll put into stock.
- They don’t put it all in at once.
- They open a position and wait to see what happens.
- They buy more when the market proves them right and the price goes up.
- So long as the price goes up, they buy more step by step.
- Their average cost per share is lower because they buy in stages.
- This lowers their risk.
If the price starts to fall, they can back out with most of their profits. If you buy only when prices are already up, they’ve got to keep going.
- Your risk is higher because a falling price means an instant loss.
Buying in stages when the market proves you right is called “scaling up.” Do it for safer equity investment.