The stock market is a place of never-ending opportunities.
But, for those of us who are new to this idea, does it entail the same charisma?
It’s all about timing and precision when it comes to key elements that can lead to a successful trading or investment strategy in the market.
So, how can you time the ever-changing stock market?
Is it possible for us to do it? Yes, it is!
Through this post, we’ll look at elements which can help you time the stock market.
1. Market Direction
In our report elucidating the 7 Step Trading Strategy of the coveted CAN SLIM Method, we speak about the importance of Market Direction.
Market Direction or the “M” of the CAN-SLIM Method is considered to be one of the most important elements to map how the market might move in the future.
Historically, 3 out of 4 stocks are seen to move in the same direction as the overall market – which could be ascending or descending in order.
Having said that, no stock is immune to this logic. The major market indexes like the NASDAQ or NSE (National Stock Exchange) have an effect on the individual stocks being traded in the market.
During a bullish market, even the strongest stocks would have a tough time keeping up their ascending pace.
So, make sure during a bullish market you take up defensive methods and not blindly hold on to your stocks as this could cause your profits to take a bad hit.
2. Understanding The Major Market Indexes
The Stock Market is a largely inclusive term which comprises of several minute components.
The Stock Market as a whole is an amalgamation of several “stock exchanges” where shares of companies are publicly traded.
Now, what are these “stock exchanges” ?
Each country usually has its own set of “stock exchanges”.
The United States of America alone has several stock exchanges within the country, while the NASDAQ and NYSE (New York Stock Exchange) are the most well known and the important ones.
In India, we have the BSE (Bomboy Stock Exchange), Calcutta Stock Exchange (CSE) and the NSE (National Stock Exchange) as three of the most distinguished stock exchanges in the country.
Out of these the NSE is usually where all the high-scale, serious trading happens!
What does the NSE and BSE track?
A recent study states that the other markets follow the US market.
Internationally, US market trends are followed.
NASDAQ and S&P 500 will lead the international stock exchanges.
US uses NASDAQ and S&P 500 and DOW only tracks 50 stocks.
So NASDAQ and S&P500 give a better direction.
So the idea is to understand the general market direction and be aware of it
NSE has several well-established companies enlist their shares in the exchange and due to this reason, it is the leading stock exchange in India.
3. Tracking the Stock Market Trends
The Stock Market is a constantly fluctuating arena. Don’t we all know that by now?
So, how do we map its constant changes – to make sure that we don’t risk any of our capital and garner most of the profits?
Are answers to these questions vital? Absolutely!
StockMarketSignals provides you with the best possible features as part of our new product which is designed to help you map the constant trend changes in the market.
The product helps you follow the share market with a few tracking techniques to help you gain a profitable trading experience in the market.
SMS provides you an overview of the 4 general market directions –
- Uptrend – under pressure
- Market Bottom
4. Being Aware of the Do-s and Dont’s Given the Market Directions
Understanding market directions comes with the responsibility of being aware of the do-s and don’t-s associated with them.
When should you buy a stock? How do you know when to sell it?
These are questions which haunt every investor or trader in the world as he/she enters the market!
When the major market indexes trend in an ascent, it’s mostly a given that the individual stocks would move up as well.
Therefore, people buy stocks when the market is in an uptrend.
Now, to make this a clearer idea, let’s look at the Do-s associated with share market directions.
(a) The Do-s during a Confirmed Uptrend
- Focus on sound chart patterns and stocks emerging strong in the given trend. A Confirmed uptrend usually indicates a good time to buy new stocks. But, while buying a new stock make sure it possesses CAN-SLIM traits and that it isn’t just any random old stock!
- Get into a market after a thorough follow-through day.
Now, remember that not all follow-through days lead to a sustained hike in the market!
This is where the idea of market reversal which leads the share market to slip back comes into being.
Always note that if the general market as well as your stocks show strength, it’s time for you to buy!
At the same time, if the signals weaken, take a step back and stop yourself from risking your capital.
(b) The Do-s During an Under-Pressure Uptrend
In the Share Market, when you witness a shift from “Confirmed uptrend” to “Market reversal” or Market in Correction, understand that this doesn’t happen overnight but usually takes a few weeks to occur.
Consider this a warning sign from the market for you to etch out your defense plan and proceed with caution.
So, what do you under such circumstances to keep yourself out of trouble?
- Be careful before buying new stocks. Since most traders in the market would be looking to sell given the situation, buying isn’t a totally bad idea!
If you’re looking to buy, be demanding in your outlook and make sure you buy stocks which show technical and fundamental strength.
- Etch out your defence plan in the market. Take a good look at each of your market positions and plan out how much you can afford to hold/sell.
If you decide to hold, set a defensive selling price.
Nevertheless, know when to get out!
StockMarketSignals provides you a tool which helps you discover a well-proven sell rules in the Share Market using stock charts to help you spot warning signs early.Always keep an unemotional, objective perspective while dealing with the Stock Market.
- Be focused on the outcome. Make your move knowing how the market is going to swing at the next minute – it could swing either way and you’ll know it only if you remain focused!
(c) The Do-s during Market in Correction (Market Reversal)
If an uptrend in the major indexes indicates a spurt in stock prices, a downturn in major indexes in turn indicates that all the individual stocks are going to be pulled down in the market.
To save your long term capital in the market, you need to make sure that you protect your profits against such downturns or events marking a market in correction (market reversal).
Now, what would you do if you’re caught in such market whirlwinds?
- Avoid buying new stocks. Be patient and wait for the next uptrend to make your purchase of shares. In case of such downtrends in the market, your chances of success would also be rather low in the given conditions.
- Cut your losses short and protect your profits. In case of a market reversal, make sure that you sell your weaker shares and keep a close eye on your stronger ones.
Also remember to set a target sell price for all stocks that you own.
- Watch out for the stock you’d wish to buy in the next uptrend. Keep a close watch on their market movements and plan out on when to make your next buy!
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5. Preparing for Stock Market Climbing to the Top
This is again a repetition of the swift movement from a Confirmed Uptrend to an Uptrend occuring under pressure and finally, the market in correction.
So, what are the indicators of a Market Top?
The word ‘distribution’ often stands for “selling” in this case.
On days that the market is heading higher and higher, people start predicting about when it might suddenly come crashing down.
We’re all aware about Icarus flying too close to the sun – a downfall is underway.
This downfall is mostly dependent on the investors with the ‘big money’ who drive the market forces up or down.
Now, to track when these investors would shift gears to selling mode from buying mode, the best way is to map the ‘distribution days’.
A Distribution Day is when one of the major indexes in the country (NSE or BSE) closes 0.2% or more in volume heavier than the previous day.
In such cases, volume need not be above average but just higher than the previous day’s.
So, how do you prepare yourself for such a distribution day?
- Safeguard your portfolio.
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- Prepare yourself for the next uptrend.
StockMarketSignals has an inexhaustive set of charts for every market context. These would help you make the right decisions about buying and selling as well as disovering which stocks are worth the wait in the share market!
6. Preparing for Stock Market Hitting the Bottom
When the market hits the bottom, we’re afraid.
There is a sense of panic and this mostly leads to a lot of wrong decisions.
Let’s take a look at how to prepare yourself for a “follow-through day”.
To begin with, a follow-through day denotes that an attempt to rally was successful and the market direction has shifted from a ‘correction’ to a ‘confirmed uptrend’.
This indicates that you can gradually look forward to buying new stocks again.
Quickly, let’s understand the key-elements of a follow-through day.
- Market hitting a new low
- Attempted Rally Successful
- Big Gain in Ascending Volume
Always remember that big profits are made in the early stages of new uptrends.
So, if you see distribution days within a few days after a follow-through, look out for the sign!
7. Understanding Short-term Uptrends and Interim Corrections
Now that we know how the market might behave and how to change our behavior in tune to those shifts, let’s understand the difference between a Bear Market and a Bull Market, with reference to the idea of short term uptrends and interim corrections.
Too many new words?
Let’s start with Bears and Bulls.
A Bull Market is when the market is in an uptrend.
These mark the good days of buying and selling stocks without worry.
On the other hand, a Bear Market indicates the market to be in a downtrend – in other words, a state of panic is declared as hundreds of thousands begin selling their stocks in fear of loss.
By now we know that’s not the ideal way to deal with such situations.
Let’s look at a scenario of Bear Market vs. Interim Corrections and Bull Markets verses Short-Term Uptrends.
Bear Market vs. Interim Corrections
Even within an upward-trending bull market, you will have what we call “interim corrections.”
The major indexes (NSE, BSE) will take a rest and pull back for a few weeks or a couple of months, then resume their climb.
The depth of these interim corrections always varies.
A Bear Market could continue for anything around 8-9 months and this is a varying number.
However, interim corrections last only a few weeks to a few months at the most.
Bull Markets vs. Shorter-Term Uptrends
Moving on, a follow-through day indicates the beginning of a new uptrend but it doesn’t necessarily signal the start of a new bull market cycle.
Therefore, a new bull market cycle can only begin after a bear market has occurred.
Bull markets mostly last around 2 to 4 years though the number of years mostly varies.
The shorter-term uptrends which occur within the bull cycles last only around a few weeks to a few months.
Always remember that you make the biggest profits in the early stages of a bull market and by the time we get into the third year of a bull cycle, two posisble scenarios may take place :-
- The market turns volatile – The enthusiasm that the bull market had once begun with starts to fade and the market slowly turns volatile. Interim corrections may frequently occur and this warns you to make practical buys as a bear market could occur anytime.
- Leading stocks begin to rise up and then fall – The theory of Icarus stands true here too. What goes up, must come down.
So don’t buy stocks thinking they’re doing well now and they might be in an uptrend all the time.
That’s never the case!
So keep an eye on leading stocks as well and if you see the warning signs, know when to exit the market!