Staying the Course
The main appeal of the long-term strategy is that it is very easy to execute, although some investors struggle somewhat with staying the course and may be tempted to sell at inappropriate times. What happens here is that you both get investors trying to act like traders, and they usually tend to do this badly, not knowing what they are doing and selling at the wrong time.
If the plan is to go long-term, one should not become overly concerned with current stock prices if the plan is not to consider selling it now, and especially if the time horizon is quite a bit into the future. What the price is now may have little or nothing to do with where it will be in a year from now or several years from now.
It’s important to keep in mind that these plays are based upon fundamentals, the strength of the stocks, and in a way the strength of the market as well, although individual investors don’t really pay much attention to macroeconomics.
They really don’t have to though as this strategy looks to take macroeconomic factors out of the picture to a large degree, allowing business cycles to run their course, riding the waves to a point where the level of the ocean is expected to be higher no matter what wave you are on.
So the fundamentals of the market as a whole do matter but we’re not looking to do much with this when we invest long term, as this would require shorter term strategies to do that, shorter than the long term that is. What we don’t want to do is to mix strategies, for instance buying based upon the strength of a company but selling when the market happens to be in a down wave that may not have that much to do with the company’s long-term prospects.
If the company’s long-term health becomes suspect though, then this can be a reason to exit the trade, because now the rationale for buying the stock has been somewhat violated. It only makes sense to do this if the prospects of the company are affected in the time frame you’re looking to hold the stock in though.
It is usually better to err on the side of being conservative when it comes to dumping stock prior to the expected time frame that you used when you bought it, because doing so effectively requires more skill. People often sell at the wrong times and end up regretting it.
They might buy back later when things turn around but in the meantime the stock has gone up and they weren’t in it. This is acceptable in some situations, when you are trading and the probability of the move is in your favor, but investors usually don’t know much about any of this and will more often than not screw up the trade when they look to dump it in times of shorter term trouble.
Shorter Term Stock Plays
One may trade shorter term based upon fundamentals, the strength of the company or the strength of the market or both, usually both. One may also use technical analysis to look at the way that the stock price has moved in the past and may continue to move, or they may use a combination of the two strategies.
Even the largest stock funds do move in and out of positions quite regularly, as they look to adjust their portfolios to best take advantage of changing conditions, and they do use both types of strategies to arrive at their buying and selling decisions.
Using fundamental data properly does require quite a bit of skill and effort, and this is not something a lot of individual investors mess around with, even try to learn well, although they might go with the opinions of those who do know what they are doing. So in that sense they may trade with fundamentals, although it’s always very important to match the time frame for the outlook on a stock with the time frame that you are looking to trade it in.
There are a lot of people out there with a lot of different opinions, and navigating all of this can prove rather challenging for individual investors. A stock’s outlook isn’t the only thing you want to be looking at when you’re looking to time stock plays either, as the outlook for the market may matter even more, depending on the situation.
Technical analysis is widely used in shorter term stock time frames, and in many ways technical analysis is simpler, as it just measures the supply and demand of a stock. This is where the rubber meets the road with stocks, the action of its price.
Whatever may end up influencing a stock, whether it’s company fundamentals, macroeconomic data, news about the company, people moving out of stocks and into bonds, momentum from traders moving in and out of the stock, or anything else, this is going to be all reflected in the price, to the exact degree that that it moves the price of the stock.
In this sense, charting data is a more direct way to measure stock performance, and even if you are relying primarily on fundamental data to trade, it is still a good idea to see what’s actually happening on the street so to speak with the stock.
If there’s data released that is bullish for a stock, but the stock is selling off, that’s probably not the time to enter the trade. It may be that this news isn’t going to positively influence the stock at all, and it might even be a negative stock market outlook overall that may counter this positive news and turn it negative.
Stock Timing is Really About Momentum
There are various things which affect the supply and demand of a stock at any one time, and this will create momentum to various degrees in either direction, depending on how the overall sum of the things that influence stock prices.
If you’re looking to do something else other than buy and hold long term, this will involve the timing of entries and exits into stocks, and to do this well, this will require that you look to measure and then ride the waves of momentum that occur.
There are a lot of waves in stock prices, and no matter what time frame you look at, one minute bars or one year bars on a chart, you will see a lot of up and down movement. There are very small waves that might last a couple of minutes, right up to very large ones that could last years.
As opposed to the long-term view where there’s only one timeframe, the long term one, shorter timeframes can be of various lengths. They might be a few minutes or a few years and everything in between.
As a general rule, the shorter the timeframe used, the more effort and skill will be needed to trade this timeframe well. If you’re using monthly bars on a chart for instance, you only have to look at the chart once a month. If you’re using one minute bars, you’re going to need to watch the chart all the time, as the movement of the price minute to minute will matter to you as this is why you’ve selected this type of chart.
Charting techniques are pretty much the same regardless of the timeframe and length of bars on the chart, so this really does come down to selecting the right timeframe on your charts that suits your trading strategy, your skill levels, and how much time you have to devote to trading.
Getting good at being able to use charts is another matter though, although if one dedicates oneself to learning various techniques, it’s not that hard at all to at least do well, although new traders tend to grossly underestimate the level of skill needed to succeed and make money by trading with charts.
Deciding what time frame one wishes to use for one’s stock plays may not require any thought at all, if one is choosing to buy and hold long-term, or it may require a lot of thought as one decides what time period one wishes to trade in relative to what they are looking to do and what they are able to do.
If one is looking to time stock plays, one can do so successfully, but this does require a fair degree of effort and dedication to become proficient at this. Buying and holding doesn’t require much skill at all though and this is why this strategy is appropriate for a lot of investors.