This article is reproduced from the Bursa Pursuit website. It’ll be useful if you intend to take part in their Challenge Game which runs from 1 Oct 2007 until 30 Nov 2007.
GOLDEN RULE 3: Always Trade With The Trend
Trends are the cornerstone of trading. If a share price is rising, we
can make money by buying that share. If the share price is falling, we need to look for other
opportunities. It does not make sense to buy a falling share. Our aim is always simple – find a share in an uptrend and take a large chunk from the middle of the trend.
Overall Market Strength
It is important to look at how the overall market is doing. This can be gauged by looking at the top 500 shares, otherwise known as All Ordinaries. If All Ordinaries go up, it is because stocks in the top 500 have risen and the market is in an uptrend.
There are over 1000 companies listed on the KLSE that you can invest in. To examine
each one individually would take a great deal of time. Instead, you trade with the trend and find the strong sectors in the market.
Strength Of An Industry Sector
What Is A Sector?
A sector is a group of companies involved in the same industry.
For example, mining companies are grouped together in the Materials sector while
banking companies are in the Finance sector. Entire sectors are generally affected by economic conditions so entire sectors tend to trend in the same directions. Trends do not have hard and fast rules, individual stocks within these sectors will perform at different levels.
Strength Of Shares In A Sector
Although the general rule of novice investors is to buy on an uptrend, there are people who buy during a downtrend as a strategy. This is a process of buying more shares as the price falls, so the average cost of the share is reduced with every purchase. This kind of bargain hunting is a riskier strategy, as the stock price may never recover. The second downside is that the price may fall and then stabilize, meaning the investor may have to wait for a while before recovering losses or making a profit. In this scenario, capital that could be used for profitable trading would be lying idle.
Resistance to this type of trading is not new. One of the greatest traders of the
last century, Jesse Livermore wrote, “Experience has proven to me that the real money made in
speculating has been commitments in a stock showing a profit right from the start.”
By now you should understand that trading with the trend is critical to success.
Also, our objective is never to buy at the bottom or sell at the top of a trend. We
simply want to take a large chunk out of the middle, like shown below. Let the trend be your friend.
Learn about Investing content courtesy of IntegraStock, the creators of a proprietary trading software for successful trading.
