Previously, I have talked about using moving averages as a precautionary measure against large-scale corrections.
However, when the market is going through ups and downs, those who trade using the moving average method would have to sell and buy, then buy and sell again repeatedly.
As a result, some investors would give up using the method after buying and selling for a few times. I think it’s dangerous to stop using moving averages as a reference, as that would mean that one would rather trust his own insights over the changes in market sentiment.
Being forced to buy and sell based on the moving averages would not necessarily bring about a loss, and even if there were some cost incurred, I advise you to see it as paying insurance fees.
Never waver when trading using technical analysis
For four times, the Hang Seng Index (HSI) has fallen back down after breaking above 28,000 points.
After going through four cycles of ups and downs, those who traded based on moving averages might have started to lose confidence in the method after having to make the painful decision of buying and selling for four times.
But if you’ve decided to trade stocks using technical analysis, never let your confidence waver.
For instance, when you lose trust in technical analysis and refuse to sell your stocks (despite the TA suggesting that you should sell), you might have to sell at an even lower price if the stock market happens to adjust.
Conversely, if you decide not to buy after having to buy and sell multiple times based on the technical analysis indicators, you might not come across a good buying opportunity again when stock prices rise repeatedly.
Long-term investing is not done blindly
Apart from technical analysis, there’s of course, long-term investing.
In other words, the investor holds his stocks over a long-term and collects dividends, regardless of how the stock price moves.
However, long-term investing is not done blindly. Many people ask me for stock recommendations for long-term investments when the stock market is trending upwards.
I cannot help them, as one of the key criteria to profitable long-term investing is to buy low. In the words of Warren Buffett, “be greedy when others are fearful”.
Another key criterion is that the stocks must be quality stocks that are so strong that they are unlikely to tumble.
If you had entered the market at the start of 2016 when the HSI was at the 18000 points level, or at the start of 2017 when it’s at the 22000 points level, you wouldn’t feel much pressure now.
However, if you had entered the market when the HSI was at 27,000 points, there would be immense pressure on you to reduce holdings.
Dr Chan Yan Chong is a renowned investment expert with decades of experience in investing. He’s guided retail investors through the various financial crises and stock market corrections and crashes. Dr Chan is speaking at our upcoming Shares Investment Conference 2H2017《股林大会》(Chinese event) on 4 November 2016 along with Buck Tan Mu Kun, Goh Mou Lih and Liu Jin Shu, who are all regular 958fm guests. Click on the button below to learn more.
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This article was translated from Chinese to English by Chen Xushuang. Click here to read the original article.