James Woolley

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Many stock market traders and investors like to be fully invested in the stock market at all times. In other words if they have some spare cash in their account, they want this money to be working for them, whether it’s seeking out capital growth or dividends (or both). However this isn’t always the most effective strategy.

The problem you have is that if you are always fully invested in shares, you will never have any spare cash to invest in any bargains when they present themselves. You will either have to accept that you have no money to invest, or sell some of your existing holdings, which you probably won’t want to do.

These opportunities to pick up bargains don’t come up every day, but they are still quite common. Indeed in the last few years we have seen the markets fall quite substantially on many occasions due to various world events. As a result of this even the most profitable and well-run companies see their share price dragged down, and there is a perfect opportunity to pick up some bargains.

There are also other occasions when certain sectors fall out of favour for whatever reason, and as a result certain companies see their share price fall to well below their true market valuation. In other words they trade on very low earnings multiples in comparison to recent years.

So the point is that you need to have some spare cash in your trading account to take advantage. You don’t want to throw your money into the markets when the markets are buoyant because there is always the chance that you are investing at the top of the market.

You’re much better off having more cash to invest when the markets are falling. It’s often said that the best time to invest is when everyone else is selling, and this is generally true. It’s not always easy to catch the bottom of course, but one good strategy is to invest in stages so that you can always invest some more if the share price continues to fall. As long as you investing in solid long-term growth companies that are trading on low multiples, this should be a very profitable long-term strategy.

However the point is that you need money to invest in the first place, which is why you should always have some spare cash in your account ready and waiting. The only time you should be fully invested is when the wider market really seems to have bottomed out, like when the Dow Jones fell below 7000 last year because then you can invest in pretty much any half-decent company and expect to make some very healthy long-term returns.

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A lot of people start investing in stocks because they are naturally drawn to the idea of making money. For that reason they will often do their research in order to find or two really promising companies that they can put their money in to in order to make big returns. However this is very often a flawed strategy.

It’s all too easy to be excited about young start-up companies because if they come good in future years, they could easily double, treble or quadruple your money. However the reality is that most of these ‘jam tomorrow’ companies will never make it big. Some will remain very small companies whilst others will simply run out of money and go bust. So as an investor you will often find that your long-term investment makes no money at all or it ends up being completely worthless if the companies you invest in go under.

This is why it’s not generally a good idea to put your money into just a small handful of companies. Okay you may see huge returns if one of them develops into a large and hugely profitable company, or is taken over by a larger competitor, but you may also lose a huge chunk of your capital in the more likely scenario that they don’t make it.

I personally think the best strategy as an investor is to invest in a large number of different stocks (across a number of different sectors) so you spread your risk and protect yourself from any major losses. That way you can afford to put your money into a few of these small-cap stocks because you know that your portfolio will not be too badly hit if these companies never fulfil their potential.

Furthermore if you assign most of your portfolio to good quality mid or large-cap stocks, you should benefit from regular dividend payments. This also cushions any losses you may incur from these smaller stocks. Plus it’s also worth noting that many of these young fledgling companies do not pay any dividends so you are relying purely on capital growth.

Anyway the point I want to get across is that stock market investing is not easy. It can destroy your capital very quickly if you’re not careful, and this is particularly true when you only invest in a small number of companies. Successful investing is all about risk management. You need to think like a fund manager and make sure you never expose yourself to too much risk, particularly in these highly volatile markets.

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Click here to read a full Stock Trading Nitty Gritty review, and to learn about the new training course that teaches you how to successfully trade individual stocks.

Many traders and investors spend hours on end testing out lots of different technical indicators. However while many of them have their merits, there is a much easier way to generate winning trades and that’s to make full use of trend lines.

Trend lines are basically lines on a price chart that show you the current trend. These lines can be applied to your charts very easily. You simply connect the high points to form the upper trend line and connect the low points to form a lower trend line.

Once you have these trend lines in place you can then use them to time your entry and exit points. The first way you can put these lines to use is to use them to help determine areas of support and resistance. You will generally find that the price will reverse downwards when it approaches an upper trend line and reverse upwards when it approaches a lower trend line. This isn’t always the case of course, but it does tend to happen more often than not, particularly on the more popular shares.

Another way to use them is to wait until one of these long established trend lines is broken. For example if there is a clear upward trend and a solid lower trend line that has been sloping upwards for quite a while now, you may want to go short on the stock in question if the price closes firmly below this lower line at any point.

Finally if a stock has been trading sideways for several weeks or months, you should find that it’s possible to draw broadly horizontal lines connecting the high points and the low points during this period of consolidation. Then as soon as the price breaks above either of these lines, you can trade the prevailing trend which nearly always takes place after one of these breakouts. This is particularly true if the breakout is supported by above-average volume.

Whichever of these trading methods you decide to use, the point I want to make is that trend lines can provide you with better trading signals than any of the technical indicators that so many traders swear by. This is especially true on many of the most widely traded shares because so many other traders and investors are watching and trading the exact same trend lines. I personally like to trade those stocks where the long-term trend is finally broken after several months of a predictable trend, but all of these methods work extremely well.

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Click here to read a full Stock Trading Nitty Gritty review, and to learn about the new training course that teaches you how to successfully trade individual stocks.

It’s natural to assume that if you are buying shares with a 5-10 year view, for example, then you don’t really need to worry about the timing of your initial entry point. However this isn’t actually the case, as I’m about to explain.

The fact is that timing is everything when it comes to stock market investing. Of course a small difference in the share price isn’t that significant if you are holding on to shares for several years, but nevertheless there are still bigger issues to worry about.

For example if you are investing in mid or large-cap stocks, then you need to think about the wider stock market index. Anyone can pick out the most profitable market-leading companies on the stock market that continue to boost both their dividends and their earnings each year. However if you invest in one of these companies at a time when the major stock market index is overbought and it subsequently heads lower, you can be sure that your company’s share price will be dragged down as well.

It’s generally best to attack the markets when the wider stock market indices have been massively oversold. It’s not always easy to call a bottom of course, but when the average P/E ratio for a particular index is very low, you should think about re-entering the markets. You should find that you can make money in the long run by investing in almost any major company when the stock markets are so cheap, but I personally would recommend that you look for strong companies with good earnings and dividend projections for the next few years, just to be on the safe side.

Another reason why timing is important is because there may be times where you invest in a very strong company, but at a time when the sector the company is a part of is either out of favour at the moment and heading downwards, or is at the top of a particular cycle and likely to fall back downwards in the coming years. In either case you should wait until the sector is relatively low and likely to head higher in the coming years based on anticipated demand and future forecasts.

The point is that if you invest in good quality companies when either the sector or the wider stock market is oversold, you can generate some very healthy long-term profits. As I said at the start of this article, timing is everything.

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With many companies offering dividend yields of anything between 5% and 10% in many instances, it’s easy to see why so many investors are drawn to these high yielding stocks. However a common mistake that a lot of amateur investors make is that they think this is risk-free money. That’s sadly not the case, however.

The fact is that you cannot simply buy one of these high yielding stocks just before they go ex-dividend, and then sell them straight afterwards for a risk-free return. Unfortunately the share price takes this dividend into account, so on the ex-dividend date you can be sure that the price will inevitably fall by the same amount as the yield, ie 5% or whatever it may be.

You can still make money from these stocks, however. You can either forget about the short-term price movements and keep them as long-term investments, banking the generous dividend payouts every year, or you can look to profit from them on a short-term basis.

This is something that I like to do a lot. All you do is create a list of companies who have generous payouts in the next few months (preferably 4% or more), and then concentrate on finding bargains from within that list. The best way to do this is to use technical analysis. If you use oscillating indicators such as the CCI, RSI and stochastic indicators, for instance, it’s very easy to see which stocks are trading at bargain levels because each of them will be indicating an oversold position at the same time.

This is a low-risk trading strategy because there are two big reasons why one of these shares will rise in the near future. Firstly because they are obviously oversold on a technical basis, but secondly because there is a forthcoming dividend payout which nearly always brings in additional traders and investors and helps to drive the price higher.

So the point I want to get across is that its always worth drawing up a list of high-yielding stocks and paying particular attention to those that have big payouts coming up. It’s not a fool-proof strategy, just like any other trading method, but in most cases it will generate some excellent results.

Furthermore you will often find that you can bank your profits without hanging around for the dividend payout either. This is obviously beneficial because you can plough these profits back into the markets straight away without having to wait a few months for your dividend to be paid.

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A lot of people spend hours on end researching various different companies in order to find a few hidden gems. However it’s worth bearing in mind that if you’re trading mid/large-cap stocks, the price movements of these shares will often be determined by the movements of the overall stock market.

For instance if you mainly trade large-cap stocks in the FTSE 100, it’s not enough to just look at individual companies. You also need to think about how the FTSE 100 index is going to fare over the coming months. You could easily pick a great company that’s underpriced, growing it’s overall profits each year and paying a healthy dividend, but if the FTSE 100 falls substantially after your share purchase, then the share price is almost certain to fall as well.

This is why I personally don’t feel that this is a great time to be buying shares in large-cap stocks. At the time of writing (January 2010) the FTSE 100, and indeed the major stock markets all around the world, have posted gains in the region of 30% as the global economy starts to come out of recession. This upward trend may well continue but I don’t see a great deal of upside in 2010. In fact I think we will probably finish the year roughly where we are now.

So in my view you basically have two choices. You can either wait for a retracement and then start seeking out good quality companies that may then be oversold, or you could focus your attention on small-cap stocks whose share price movements are driven by individual company news. My own strategy is to apply both of these strategies because I always like to have a mixture of small and large-cap stocks.

Anyway the point I want to make is that you should always keep on eye of the wider stock market and make your trading decisions based on these markets. For instance if you’re a UK trader like myself, it’s generally a good idea to use technical analysis on the FTSE 100 to see when it is oversold. Then you can start looking for decent companies knowing that the price is likely to rise as and when the FTSE 100 recovers. Plus the rise is likely to be greater if you pick those companies that offer the best value.

Stock market investing is all about timing. The key to success is to buy low and sell high, and the best time to do that is when the overall stock market, whether it’s the FTSE 100, Dow Jones, DAX or the Hang Seng, for instance, is temporarily oversold.

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