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Trend following (04/07/2004)
By Al Thomas


     
Trend following also called momentum trading is the simplest and safest method of stock market investing. It puts you in stocks and mutual funds that are going up and gets you out when they start down. Properly done there is no guess work.

How many times have you bought a stock or fund because of deep analysis? You have gone to Morningstar and bought their extensive reports - many of which are months old, but you don't know that. Maybe your broker sent you a bushel of pretty reports about how wonderful is this particular company. Unfortunately each time you bought it the stock or fund either did not go up or went down.

Once you are touted about some equity you can be sure you are not the first and you might be the last one who bought at the top of the move. What can you do to avoid this kind of Wall Street trap?

Where can you find a stock or fund that will actually go up after you buy it? One thing I will say is not to try to pick individual stocks. Leave that to the pros. The best place for your money is in a no load mutual fund (that's no commission) or an ETF, Exchange Traded Fund (a type of mutual fund that trades like a stock). A fund has a professional money manager who should be capable of buying good stocks. He spends his whole life doing this where you have another occupation.

There are many places on the Internet that rank mutual funds by performance such as Yahoo.com, stockcharts.com, barcharts.com and many others. Performance means it is going up more and faster than all other mutual funds. You can also find a listing of funds in Investor's Business Daily or you could subscribe to a service that does all this for you such as NoLoad FundX. Forget Morningstar and their star ratings which are meaningless.

To determine whether to buy or sell you can use a very simple 200-day moving average and you don't have to do the computation. Go to www.bigcharts.com and click on their Interactive charts. In the left column you will find a place to type in 200 and then that line will appear with the fund symbol you entered. When the fund is above the line you want to own it. When it is goes below the line you will want to sell it. Yes, it is that simple.

There is no Holy Grail trading method, but trend following comes about as close to it as the average person will find. A trend follower understands there will be occasional losses, but he also knows that when any major trend starts he will be participating for at least 60% to 70% of the profit of the move. He knows when to buy and more importantly when to sell.

Copyright 2004 Albert W. Thomas All rights reserved. Author of "If It Doesn't Go Up, Don't Buy It!" www.mutualfundmagic.com comments to al@mutualfundmagic.com 

 

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