January 20, 2009
Using Technical Analysis to Achieve Higher Returns
In today’s market, investors don’t need to adhere to buy and hold
strategies to achieve a desired rate of return. In fact, investors can achieve
a 30% return with only six buy side moves followed with six sell side moves.
How? Technical Analysis.
Technical
Analysis
identifies trend lines that outline patterns of movements made by stocks, and
can be utilized in making sound long-term investment and short-term trading
decisions. As prices move fairly and predictably, each stock has trading ranges
that allow for precise entry and exits of the investment thus providing
opportunities for successful investing.
A look at
Technical Analysis
Research in Motion (RIM-t) was valued at $95 on February 22, 2008 and on
August 14, 2008 it was valued at $139.24, equating to a +46.6% return during
this time frame. Investors could have achieved a 30% return in less than six
months if they adhered to conventional buy and hold strategies. However, RIM-t
collapsed from a high of $150 in this same period down to a value of $102. Many
investors would have sold the security at some point downwards and cashed out of
the market. To prevent cashing out during market volatility, investors need to
remain focused and disciplined in their approach to investing. Taking profits
every 5%-6% will give your portfolio the insulation and protection that is
desired in any bear or bull market.
How to use
Technical Analysis
Investors need to locate an investment that has trend lines that provide
them with decisive technical patterns that make investing in the stock
predictable and rewarding. Let’s look at Research in Motion more closely.
RIM-t provided twenty-four 6% positive trend moves between February 22nd
-2008 and August 15th – 2008. If RIM was sold at every 6% gain, a
144% return could have been achieved in six months time. This is far greater
than the 46.6% return via a buy and hold strategy. Remember that the likelihood
of an investor holding RIM during its spiral downward is minimal, thus reducing
the buy and hold return form 46% to far less – more likely 12%.
Keep in mind that the 144% return assumes that the technical trigger was
reached 100% of the time. This is not a realistic expectation – even industry
professionals don’t have a 100% success rate. However, it is realistic for
investors to adhere to the strict technical policy of selling an investment once
a 6% return has been achieved, and then buying into the same security once a new
technical entry point or trend line presents itself. Alternatively, the investor
could buy into another security that presents the same technical trend line
entry signal.
If
profits are taken every 6% and then reinvested in a stock (or the same stock
that was just sold once the technical trend line signal has been given),
investors can achieve a 30% return in far less time than a conventional buy and
hold strategy. Six buy side and six sell side moves will lead to a return of 30%
if you adhere to the discipline of Technical Analysis.
