Master the “50/50 Strategy”

10/03/2011 8:00 am EST

Focus: STRATEGIES

Charles Schaap

Founder and President, TradeLikeAPro

Using the 50-period moving average and relative strength index (RSI), investors can identify solid buy and sell signals for a mid- to longer-term holding period, explains Dr. Charles Schaap.

I’m talking the 50/50 strategy with Dr. Charles Schaap. Charles, what is the 50/50 strategy?

The 50/50 strategy is a strategy for trend trading. It is especially useful for the long-term investor.

By long-term, I mean someone who wants to own a stock for several months to a couple of years. It is important because it is easy to understand the strategy, and it’s sort of like the best bang for the buck, in my opinion, of any of the strategies that I use. 

It is based on a 50-week moving average and an RSI with a period of 20. We look at its position above or below the 50 level. That’s where we get the “50/50.” 

If price is above the 50 moving average (weekly) and RSI is above the 50 level, we have uptrending conditions.  What’s important for the investor to understand is a 50-week moving average does not turn very quickly. It’s a very slow-turning moving average. 

So, if the market begins to stutter or possibly enter a period of uncertainty or even a downtrend, we have weeks to months to recognize this on this longer-term time frame, so there’s no alerts that have to go off, and you don’t have to stress, and it’s a very easy strategy to use. 

Are there any stocks that are jumping out at this 50/50 strategy that look attractive even though market conditions appear to be deteriorating? 

Well, the first thing to understand is that there’s always opportunity in the market. Approximately 70%-75% of stocks move with the overall market, but there’s another 25% to 30%—especially newer-issue stocks—that have their own personality. They’re going to move however they want. 

Always remember that as the market declines, the money is taken out of certain stock issues. It’s got to go somewhere, so it’s put into other stocks that people aren’t necessarily watching. 

So, what’s most important in using the 50/50 strategy is to find stocks with a rising 50 moving average. There are many, many, many opportunities. In fact, there are more than a person can actually trade—usually, the average person, with their bankroll.

Do you have any examples you can share with us today?

Sure I do. One other point is that right now—after a market selloff—is one of the best times for the 50/50 strategy because what happens is price falls back to that average and it sets up the next buy point. 

I brought a list of stocks, and I’ll name a few of them that readers can look at: US Physical Therapy (USPH), Viropharma (VPHM), MAKO Surgical Corp. (MAKO), LogMein, Inc. (LOGM), Neogen Corp. (NEOG), Sapient Corp. (SAPE), and I post a lot of these on my Web site, StockMarketStore.com. 

These are all stocks that have a rising 50 moving average, and you simply have to wait for the 50/50 buy alert.

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