Where to buy a share?

The quick answer? Never at the top. Never at the record high!

It’s a rookie mistake when starting to invest, buying a share because the news reported “Mr So-and-So bought another R1m worth of shares…” or because “my friends have made an 80% return on a share and now, I want to make the same.”

This is not a sustainable strategy, and keep in mind for every buyer in the market there has to be a seller, so If Mr So-and-So bought R1m worth of shares that means someone will have to sell that stock in order for the next buyer to buy the stock. If there are more buyers, yes, the price goes up but if there are more sellers the share price starts to decline.

The other mistake newbies often make is to invest based on the idea of “good results”. Nobody knows how investors will react after the financial results are reported. Sometime the results are fantastic, and one would think that the share price would rise, but some investors might think differently. For example, perhaps they may not believe the trend can continue and would rather consider taking profit and look instead for something else. Sometimes the results are shocking, but the share price starts to rise anyway because investors realize it may kickstart a change in management that will then turn the situation around, making further investment in the shares viable again.

This is exactly why we love technical analysis because you can see on the graph what investors think of the share, are there more buyers or more sellers no matter what the results were.

When does one consider buying a share on the technical graph?

  1. When the stochastic is oversold (below a 20) and a positive divergence becomes visible where the K-line has broken upwards through the D-Line.
  2. The share has stopped making lows and is starting to consolidate sideways at least or higher lows on the candles must be visible.
  3. A bullish pattern must be visible on the graph. A cup and handle or inverse head and shoulder or double bottom are all indications that the sellers have dried up and that there are only buyers left.
  4. A turnaround candle must be visible, like a bullish engulfing, dragonfly candle, inverse hammer candle or a tweezer bottom.
  5. A moving average has changed into a support. Short term traders can use 10 or 20-day moving averages. Medium term investors can use the 50-day moving average or long term investors can use the 200-day moving average on daily graphs.
  6. Golden cross formation is visible. A golden cross is bullish indication for buyers when a shorter term moving average breaks through a longer-term moving average. Short term traders use the 3 & 8-day moving average, medium term investors use the 26 & 9 day moving average and long term investors can use the 50 & 100 or the 100 & 200-day moving average.
  7. A spike in volume is visible along with a rise in the share price.

Always keep “down and out” shares on your radar. It is often the beaten and bruised shares that perform the best once they start to rise from the ashes. When nobody wants them, that is when you must pull them closer and have a better look at them.

Now you know when to buy. The next very important question you need to answer is how much of a share to buy and that all comes down to your investment strategy. We always suggest phasing yourself in and not buy all of it at one time because anything can happen to the share price.

Nothing is a guarantee in the stock market and even technical analysis works with possibility and probability and is not an exact science.

If you invest in shares/equity you will use a different strategy than a CFD trader and I really suggest you watch this video here, especially from the 45-minute mark to see how to determine your position size when you are a CFD short term investor. You will not use the same strategy when investing in shares UNLESS you want to consider taking stop losses.

In the Chris-tell subscription we teach an investment model on how to invest in shares without taking a stop-loss, but never will one share/ETF be more than 10% of your investment portfolio.

Nothing said withstanding, remember, when you invest on the stock market you can have all the right tools but if you don’t have self-discipline and patience, you might find investing very frustrating and you will probably make the wrong decisions.

So when you set up your graphs and read the reports make sure you put some patience and self-discipline tablets in your drinking water as well, you will need them!

See you soon


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