Note: This is not financial advice to buy or sell specific assets. Consider it purely entertainment, and if you are kind, educational in nature. Everyone’s financial situation is different. Please speak with a proper financial advisor before making investment decisions.
In this blog post, we will cover how to buy stocks and crypto with less risk. Fifteen months ago, I wrote about The Art if Paying Down Debt and Lessons from meeting a financial professional. Our situation at the time was one of high debt, high expenses, and not enough cash to save, invest, or retire. After speaking with numerous financial professionals on how to better our situation, we were not satisfied with any of the answers. We created our own plan to pay down debt, cut down expenses, save more money, save more for retirement, and increase our return on investments. Some progress has been made in bettering our goals. We have a long way to go, especially when the hole is big and has taken a long time to grow.
A high percentage of American millionaires, and I bet globally, have become millionaires due to real estate. Real estate never tickled my fancy. It’s something I am looking into further, such as our small investment in Fundrise. This allows us to diversify and buy many properties for our investment. Perhaps it was the large concentration of wealth in one small area, long time to save, and the high down-payments that scared me. The returns for our Fundrise account were better than expected last year. Most millionaires have 5 to 7 different streams of passive income.
What has interested me over the last 20 years was buying and selling stocks. The ease of investing is a plus, and the ease of trading often is a negative. Studies have shown those that trade more often incur higher fees and have less returns. Men trade more often than women. We are naturally at a disadvantage. I’m always looking for ways to improve my investing and do less trading. I have found a way that has a high probability of success and lowers your risk. This method is similar to dollar-cost averaging. The major benefit is not buying at high prices and buying more at low prices.
Starting in November, the Nasdaq index topped out, rolled over, and started going down. Is it better to buy fewer shares of the index at 16000 or more shares at 13400? This is a silly question, we all would choose the cheaper shares. The problem is looking back in time is easier to find ideal times to sell and buy. How do we do it close to real time?
The above is a daily chart of the Nasdaq over the last year. This is the red and black dashed line in the top panel. A daily chart means closing prices are plotted , with prices on the y-axis and time on the x-axis.
The solid blue line in the upper panel is a 5 day moving average. A moving average takes the last five days of prices, adds them together, and divides by 5 to create a simple, rolling average. This is plotted over time. This line will gyrate up and down quickly as prices move. The solid red line is a 34 day moving average. It’s the same as the five days, except uses 34 days of data to create the average. This line is more stable and changes more slowly. Why 5 and 34 you may ask? Both are Fibonacci numbers. The stock market likes Fibonacci numbers and ratios. You may hear in financial news that the 50-day moving average has crossed above the 200-day moving average to show the trend has changed to bullish. Those large average numbers are far too large to be actionable, in my experience.
We want to find a time to buy when the 5-day moving average is far below the 34-day moving average. That means prices have been falling rapidly in the short term compared to longer term trends. These are usually better times to buy, fear of loss is at a maximum, buyers are exhausted, and prices are cheaper from previous highs. Stocks may be one of the rare things where people are more excited when things to up in price and more anxious to purchase when they go down.
Stock markets run on fear. Fear of missing out and fear of loss.
– smilingdad
The lower panel introduces an indicator called the Moving Average Convergence Divergence indicator (MACD for short). This is one of my favorite indicators. The black line in the lower panel plots the 5-day moving average minus the 34-day moving average. The red line in the lower panel takes an 8 day moving average of the above. We call this the signal line. When the black line crosses above and below the red line, it is a signal to buy or sell. You can use any numbers to calculate the indicator. The numbers I chose above are responsive and have worked well in a variety of situations. You can see an example with the green circle on the lower panel.
Here are the key things I look for to sell cash and buy stock.
- The black line of the MACD must be below zero. The further below from zero, the better. In our example with the green circle, the black line went below -1000. Stocks and indices tend to bounce strongly when they are this beat up. We can see over the past year, the black line of the MACD has never reached this level.
- The black lines crosses above the red signal line. This is a sign that things are turning around. You can buy now, or wait for the inevitable pull back. We can see a good pull back at the green line at 14000. This reduces risks of buying with emotion. I’m guilty of that, and emotions will not help you when investing. The calmer you are, the more disciplined you act, the greater the chances for success.
That’s it! I have started saving up my cash and waiting for these better buying opportunities. It doesn’t mean stocks won’t go down further from here. Sure they can. It’s best to start with stock indexes or large companies where the chance of bankruptcy or significant loss is close to zero. Stocks move in cycles, like beams of light, or waves of sound. They follow the same physics as the rest of the world. No system will work 100% of the time in the stock market, that’s a fool’s game. We can increase our chances of success and reduce our risk of debilitating loss. The higher the success chance, the greater odds we make money over time. Next post, we’ll look at when to sell.
Warmest regards,
smilingdad
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