How to Buy a Stock the Right Way

11/27/2015 7:00 am EST

Focus: STRATEGIES

Do you remember when you were a kid going to the market with your mom? When she got to the fruits and vegetables section, she stood there for what seemed like forever, squeezing and poking and squeezing some more, and finally, when she was just about to put that one in the cart she changed her mind, squeezed and poked some more, and then took the one all the way on the other side, almost causing the entire pile of cantaloupes to roll down all over the floor?

How bout your first car? Did your dad come with you? Did he ask the guy a thousand questions? Did he check the spot under the car for dripping oil and transmission fluid? Did he carefully analyze the tire tread to see if the wheels were in alignment? Did he make the fellow start the car over and over just to listen? Who knows what he was listening for?

Anyway, I'm sure you can appreciate that we all have our ways to tell if what someone is offering is what we want. We have a set of rules and a set of procedures to follow those rules. Why should it be any different in the stock market? We have our strict criteria and then we do the necessary work to assure adherence. Most of you reading so far would agree with me in theory. The problems come up when we apply it. Many have been known to throw the rules out the window when we see something we think we want so badly, whether it's a '69 Camaro or a juicy melon. Patience, folks; do the work. If you miss it, another will come along.

So what are our criteria? Well, for different types of trading there may be many, but there is one that comes up almost always, with very few exceptions. If you adhere to this one, although the others are important, this will keep you away from the lemons of the world.

Here is the rule: Only buy stocks that are in uptrends on the time frame you're trading. And why, you might ask, is this rule such an important one? Here is the answer: It's in the expectations. When a stock is in an uptrend, the expectations are for higher pivot highs and higher pivot lows to follow. When a stock is in a sideways trend, the expectations are for equal pivot highs and equal pivot lows. When a stock is in a downtrend, the expectations are for lower pivot highs and lower pivot lows. So if you buy all three of those stocks, which one has the greatest upside expectations? The uptrending one does because once it reaches the prior pivot high, it is the only one where the expectations can justify the possibility (or the probability) of higher prices. So in theory, although any stock can go up, the one in an uptrend can go farther. It's expected to do so, while the one in a sideways trend is expected to stop at the prior pivot high and reverse, and the one in a downtrend is not expected to even make it to the prior pivot high!

This might not seem like such a big deal. You may see a '69 Camaro in a downtrend and say to yourself "Oh but that's the car for me! I love that car." Folks, that is what you are doing every time you buy a stock in a downtrend. You are projecting your personal emotions onto an inanimate object. You are substituting your feelings for accurate mathematics. Don't do it! How do you buy a stock? Start by squeezing it firmly and seeing if it's in an uptrend!

By Avery Meizner of Pristine.com

 

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