From Long-term Investing to Short-term Trading - How to Profit on the Stock Price Rise and Drop

Jan 27, 2009 copyright © David S.Y. Wong, published in SelfGrowth.com

In my early days of learning the stock market, I came across expert advice from various sources that said "you cannot time the market" and "it is best to buy-and-hold for the long term". I researched and consulted expert commentary to understand the fundamentals of companies whose stocks I would be investing in.

It was a ton of preparation followed by a buy action on the stock. Then it was time to sit back and wait for weeks (that was my time horizon). This exercise was repeated with different stocks from different sectors (e.g. technology, medical, mining). I monitored my holdings and as often is the case, I was in the red with my positions.

To make a long story short, I did not have success with the longer-term buy-and-hold strategy. Perhaps I did not pick the right stocks, but I did listen to expert analysts. Perhaps I did not buy the stocks at the right price (which means it was not the right time to buy), but again it was based on listening to expert recommendations. Perhaps I did not hold the stocks long enough.

I then embarked on learning about technical analysis and started getting into the mindset of trading the stocks and capitalizing on the rise and drop of the stock price, which most certainly happens all the time. The only other thing a stock price can do is to remain unchanged, but an examination of stocks will quickly reveal that few stocks stay fixed at the same price point over days, weeks or months. And if the stock price does stagnate, the worst outcome is you make no money, nor do you lose.

After examining various technical analysis techniques, I began to formulate some basic questions. What is the direction of the stock price? Is it trending up or down? Where is the top of this current run-up of the stock price? Where is the bottom of this current run-down of the stock price?

After experimenting with interpreting various technical indicators, both in the context of paper-trading as well as actual trading, I came to some basic conclusions. The trend is my friend. If I get the price movement direction correct, my trade will profit. If I buy and sell at the right times, my trade will succeed. Timing is everything. Holding for the longer-term, or for whatever pre-determined period makes no sense - I will hold the stock for only as long as necessary to make my profit - It is the trend from trough to peak that dictates how long to hold the stock.

I do acknowledge that what I am saying about following the trend also applies to longer-term trend lines. I happen to have a trading style to pursue the shorter-term trend lines i.e. on the order of days, rather than months or years.

I have found candlestick technical analysis to be a good foundation for a trend following system. Your style and time horizon for trading may be different but you may want to investigate and consider the approach.

Jan 27, 2009 copyright © David S.Y. Wong, published in SelfGrowth.com