By James Woolley
Many people new to share trading overcomplicate the whole process. They load their charts with lots of fancy technical indicators and are constantly testing out new systems in order to try and find that holy grail trading system that’s going to make them rich. However it should be pointed out that the most basic systems are often the most profitable.
If you look at the price patterns of various different companies you will generally see that when a stock is trending upwards it will never go up in a straight line. Even when there is a very long-term upwards trend there will always be pull-backs along the way.
So therefore if you are looking to trade these long-term trends then a very simple but effective trading strategy would be to wait for one of these pull-backs and then enter a long position as soon as the price moves back up again.
To help you with this strategy you may like to use a technical indicator or two to help you. For example two indicators I like to use are the exponential moving averages (5 and 20) and the parabolic SAR.
So what you do is you identify shares that are in established upward trends, then you wait for a pull-back where you should hopefully see the EMA (5) cross below the EMA (20) and the parabolic SAR turning red. Then you simply what for the price to reverse back up again and resume it’s upward trend which is often signalled by the parabolic SAR turning green again and the EMA (5) crossing back up through the EMA (20).
To give you a real-life example just take a look at the daily chart of Amazon (AMZN). You will see that it trended upwards between November 2008 and May 2009. The price then pulled back and we saw both the parasolic SAR turning red and the EMAs crossing downwards. Now this may have signalled the end of the upwards trend but as it turned out the EMAs crossed back upwards and the parabolic SAR turned green which was an excellent opportunity to go long again. As a result the price raced through the $80 level and went all the way up to around $88.
So you can see that this very simple trading strategy can produce some excellent results and it’s a lot more effective than most of the overcomplicated systems that a lot of traders use. Successful share trading isn’t really that difficult. You simply need to look for shares that are trending either upwards or downwards and then find a way of profiting from this trend, which you can do by using a simple system such as the one above.
About the Author
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