Investing With a Defined System

Monday, 07 Jan 2013 07:39 AM

By Sean Hyman

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Through the years, I have met a lot of investors and traders through my work at Charles Schwab and at Forex Capital Markets.

One thing I can tell you is that many people trade or invest, but they don’t have a plan. Oh, they think they do. They will call it “their gut.”

Another thing they do is guess by buying on good news and shorting on bad news. However, neither of these approaches work over time.

I once heard a very seasoned floor trader tell a newer trader that he had to have a strategy that was defined. In addition, it could not be overly complicated. He said all of the successful traders and investors that he has seen not only had a defined strategy, but they could write it down on an index card and it would fit on the front side of that index card.

I wholeheartedly agree with this.

You see, while many traders and investors are hopping from the latest strategy of someone else or the latest technical indicator, I was assessing what really mattered in the movement of stocks.

I learned to focus on the fundamentals of a balance sheet that really matter. However, I knew that was not enough. A great company fundamentally can go down for a long while, even for years.

So I knew I needed to pay attention to technical analysis too so that I’d know when the stock that had solid fundamentals was likely to turn around to the upside.

Additionally, I learned how to gauge the sentiment of the masses. This has just as much to do with why stocks rally or plummet as anything. This is something that the pure fundamentalist or pure chartist has a hard time doing. But I knew this too mattered. Therefore, I honed my skill there too.

Then I had a three-pronged approach that encompassed the best of the major forms of analysis: sentiment, fundamentals and technicals.

The plan is simple. It fits on an index card. And it has helped me and my subscribers in my Ultimate Wealth Report newsletter to beat the Standard & Poor’s 500.

And since I’ve been in the markets for over 20 years, I have a great ability to follow my strategy to the letter. That is another area where the trader or investor misses it. They will get a plan together that works, and then they don’t work the plan.

I know that may sound funny to some of you. But, in the end, most traders and investors buy and sell off of emotion. It causes them not to follow their trading or investing plan consistently. And anything that you don’t follow consistently just doesn’t end up working out as it should. Trading and investing are no exceptions to this.

So before you invest your hard-earned capital in the market, make sure you have a plan that holds water — something that has a decisive edge.

In other words, if someone were to ask you why you selected the stock that you chose and they also asked you why you decided to buy it when you did, you ought to be able to easily answer those questions.

Again, I know that may sound silly, but I’ve asked many traders and investors why they bought what they did. And when it came down to it, they really couldn’t tell me.

Now here is the good news. If you don’t want to go through your own learning curve of falling down and skinning up your knees in the investment world, you don’t have to.

You can follow someone who has already paid their dues and learned the hard lessons. I’ve been involved in the markets for over 20 years and I have seen many things come and go. When you’ve watched financial markets for that long, if you’re paying attention, you’ve learned what matters and what doesn’t.

I’ve found that much of the investment world focuses on what doesn’t matter. And they don’t know how to buy a stock in order to gain an edge over the return of the S&P 500, thus “beating the market.”

I’ve found a way to beat the return of the pure fundamentalist. I’ve found a way to beat the return of the pure technician/chartist. I have found a way to beat the return of someone who strictly trades off the sentiment in the market. I’ve done it by combining the strengths of all of these forms of analysis together.

For instance, the strength of fundamentals is that you know that you’re buying a good, solid asset. However, you still don’t know when the best time to buy it is. That is where technical analysis shines. But where technicals are weak is that they don’t know if the asset being purchased is sound or not.

In other words, the chartist doesn’t know if the company makes money or not. They don’t know if they are loaded down with debt and about to run out of cash or not.

Yet the pure fundamentalist can only buy and know that after five years or more of holding it that his investment will pan out.

So if you don’t want to have to figure all of this out on your own and you want to follow someone who does this all the time, then come join me in the Ultimate Wealth Report at www.seecurrencywars.com.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.

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