Verifying that what you are about to buy for an investment actually has a great probability of going up and making you money is an important element of stock investing. Of course, the same holds true for buying ETFs or mutual funds. The greater our confidence in our investment selection the more likely it is to be a winner.
I like to follow a three-step plan in making my investment decisions. If an ETF doesn’t pass all three steps I rarely buy it. I say rarely because there is always the exception to the rule, but the exception is just that, an exception, a rare change.
My 3-Step Plan involves:
• Analyze my group for the best ticker symbol
• Verify the group strategy performance is positive
• Verify the selected ticker shows positive indicators
I have followed these steps for many years and they have prevented me from making bad decisions, emotional decisions and most importantly, from losing any substantial amount of money.
Analyzing is the process of evaluating my groups according to a specific means of technical analysis. I normally use Alpha, but you can use any type of analysis such as:
• Alpha
• Relative Strength Momentum
• Return
• And/Or add Standard Deviation to any method
Once your computer has found the best ticker symbol to buy based on analysis you should verify that the symbol chosen is in fact ranked better than the index or benchmark you are using for comparison purposes. If the symbol is not performing better than the benchmark then it is likely going down and you would lose money. So don’t buy it. I also like to see that the particular symbol is ranked near or at the top of the list of all my symbols in the particular group.
Verifying the strategy is important to make sure that the overall strategy with its buy analysis and rules for selling are profitable. Strategies can be profitable some of the time depending upon overall market trends while not productive at other times; this is normal.
I use two charts in particular to verify the effectiveness of my strategies. You can make you own choices, but mine are:
• Moving Average
• Full Stochastic
In the moving average chart, I want to see that the price line for the recommended symbol is above both the slow and the fast moving averages. This would be a buy or hold signal. In between the lines is a maybe or watch me signal, while if the price line is below both of the moving average lines, yes, that is a don’t buy it signal.
Reading the full stochastic chart is a bit trickier. Here I look to see if the stochastic line is above the trigger line. When this occurs in the lower fifth of the chart it is a buy signal; when above the upper fifth, it is a hold and possible buy signal. When the stochastic line cuts down thru the trigger line in the upper fifth of the chart it is a sell or don’t buy signal.
The best buy signal is when both charts are signaling buy, but occasionally one chart will say buy while the other is neutral or maybe and I may buy in this situation depending upon step three.
Verifying the ticker is critical to be sure its movement is positive. I look at the same chart types for the particular selected ticker as I did for the strategy: moving average and full stochastic.
With the ticker, I want to see a buy signal in the charts. Sometimes between the four charts I may have just two or three buy signals. Four is obviously best but with three and with the fourth chart heading towards a buy signal it is usually safe to go with that selection.
Implementing this 3-Step Plan sounds more complicated than it is. I can go through the entire process for a dozen strategies in 15 minutes or less. And actually there is software that now automates this process and shows you the results in just a few moments.
If you are concerned about managing risk, about safe investing and maintaining your cash base through market ups and downs this 3-Step plan or one similar will help you achieve your investment goals.