7 Ways To Know When To Invest - And When To Get Out
1. Moving Average Indicators. A stock closing above its average is a buy signal, whereas a stock closing below its average is a sell signal. This method lets traders get in on a trend after it has started and ride it to the end. However, the lag time may be detrimental, as it forces traders to enter late and leave late.
2. Stochastics and the Relative Strength Index. These mathematical formulas, described in more detail in the book, identify tops and bottoms of trends as well as indicate when a stock appears to be overbought or oversold.
3. Chart Patterns and Formations. These highly visual indicators are logical and allow anyone to observe a stock's trend. However, it is difficult to objectively test for accuracy.
4. Parabolic. This mathematical formula provides traders with two values each day, a "sell number" and a "buy number." When a stock reaches the buy number, traders should go long and close out short, whereas the sell number indicates close out long and go short.
5. Directional Movement Indicator. This indicator measures the strength, not the direction, of a market trend. It is most useful in conjunction with other indicators.
6. Momentum and Rate of Change. When momentum crosses above its zero line from a negative reading, a stock is considered to be in a bull trend. When momentum crosses below zero, the stock is in a bear trend.
7. Accumulation Distribution. One of the more important indicators, this gives a measure of whether the market is overall bullish or bearish.
A combination of two or more of the above strategies can give a short-term trader a fairly accurate general picture of the market and give some guidance as to the trader's actions. Jake Bernstein gives examples of these indicators, as well as more in depth explanations, in Hot Stock Market Strategies, now available from Entrepreneur Press.
Jake Bernstein has been involved in the stock market since 1968 as an investor, analyst and consultant. He is the author of more than 35 books on trading and investing, and his expertise has been sought by the Wall Street Journal and other national media. His latest book, Hot Stock Market Strategies, covers four short-term trading strategies and one day trading strategy, as well as giving an overview of the stock market and of gen