The figures speak for themselves. Over 90% of traders and/or investors either lose money or break even. This is a sad result given that establishing a profitable portfolio is one of the best ways you can create real wealth and secure your financial future. Being a profitable investor can provide a lifestyle that many dream about and very few get to experience. Becoming a profitable investor adds the benefit of ‘choice’ to your life. You have the choice of what you want to do, with whom you want to do it, when you want to.

Sounds good right?

So what is it that the 10% of traders and investors who actually make money know that you don’t? What is it that sets these traders apart from the pack?

The Number ONE Investing Skill You Must Know to Succeed

After teaching thousands upon thousands of students how to trade and invest profitably I have identified one major skill that is consistent among those that make money. By knowing this one crucial skill, by studying it until it becomes second nature and then applying it actively to your share market investment activities I guarantee you will see a huge improvement in your bottom line.

You see what I find is that most traders or investors tend to make a few crucial mistakes that make a significant impact on their results and by utilizing the information in my article that I am sharing with you today you will be able to avoid making these same mistakes and share the profits of the 10% who actually make money. So what are these mistakes that the large majority make?

Know the Right Time to Buy

Unfortunately most traders and investors don’t know the right time to buy shares and therefore purchase stocks far too late into a primary bullish phase. This leads to decreased profit because you have missed out on a large proportion of the run up and contributes to diminished portfolio returns if such a flawed tactic becomes habit. And this obviously leads to frustration, disappointment and annoyance

Know the Right Time to Sell

Selling shares far too late is another common trait shared by most traders and investors. Greed tends to take over when you are ‘on a good thing’ and the expectation that the stock will go up forever comes into play. This is of course a fallacy as we all know that what goes up must eventually come back down. What I tend to find is that what 90% of traders and investors do is buy a stock with no concept of when and how they will sell. This is a dangerous routine. Have you ever heard someone you know say ‘it will come back eventually’ when referring to a stock? These are the people that don’t know when to sell – don’t be one of them. I have seen more than my fair share of people turn a profitable investment into a losing investment simply because they didn’t know when to sell or didn’t follow their rules as to how they would sell.

The number one trading/investing skill I am going to share with you will show you how to avoid these mistakes

Buy, Hold and Pray

I talk to new traders and investors all the time both in person and over the phone. Such people normally approach me and my team at Wealth Within after they have either frustratingly lost money in the markets or are disappointed at their overall returns. When I dig a little deeper to discover how they trade or invest and question them on their overall strategy I normally find they have purchased stocks either due to a ‘hot tip’ from a friend, a recommendation from the paper or because they had a ‘good feeling’ about this stock or that stock. Now, such methods may produce some one-off winners, but for the most part this type of investing is never successful consistently. I like to call this the ‘buy, hold & pray’ method. As the name suggests, the people who fall into this category tend to purchase stocks without a solid investment strategy, without investigating whether a stock is likely to be a solid performer, without establishing when and how they should buy and then ‘hope and pray’ that the stock will eventually rise and provide a profit. Let me be clear that this is not an investment method to which you should subscribe.

So what is the number one investing skill that can avoid all of these unnecessary mistakes?

The method that when applied will ensure you know with great certainty the right time to buy, the right time to sell and avoid the nasty buy, hold and pray approach?

If you haven’t guessed it already, the number one skill of successful investors and traders is accurately identifying market or stock DIRECTION

If as a trader or investor you can correctly ascertain the direction of the longer term trend, you can pinpoint with great certainty, the right time to buy and sell which means you will be far more profitable over time.

Unfortunately, so many people either ignore or don’t understand this crucial element to successful investing

Despite what others may advise, it really is quite easy for an individual trader or investor to make superior returns from the market. By understanding some simple rules that have been used for well over a hundred years, you too can accurately gauge the start of a bull run and achieve great profits from the market.

Introducing the Master of the Markets….

Charles Dow was arguably one of the first technical analysts to truly define the commonalities found in bull and bear markets. He discovered that certain measurable trends evolved over time.

Unfortunately he passed away before he was able to quantify and publish his full findings. However a number of Dow’s associates combined his various workings into what we know today as Dow Theory

There are several aspects comprising Dow’s Theory however in this article we will review what I believe to be the most crucial findings in his theory and how you can use these to your advantage in determining market direction.

The two primary tenets of Dow Theory relate to trend and are as follows

• There are three types of movements in the market:

1. A primary trend, either bull or bear, which may take place over several years;
2. Secondary movements or reactions, which usually take place over many weeks or months and run contrary to the primary trend; and
3. Daily fluctuations, which can move in either direction (bull or bear).

Figure 1 below indicates the three different types of movements in the market.

Figure 1

Primary Movements

The primary movements in Figure 1 are the principal focus of Dow Theory. Each primary trend, whether bull or bear, encompasses three phases which reflect the market behaviour we are trying to identify.

The three phases of a bull market include:

Phase 1: Renewing confidence

Phase 2: Improved earnings

Phase 3: Rampant speculation

The three phases of a bear market include:

Phase 1: Abandonment of hope

Phase 2: Decreased earnings

Phase 3: Distressed selling

Figure 2 below highlights the three phases of a primary trend in both a bull and bear market.

Figure 2

So how does this apply to our market and where does our market currently lie with respect to Dow Theory?  Below in Figure 3 you will find a weekly chart of the All Ordinaries Index as at 12/02/14. You will note that I have marked several areas with the relative phases the market appears to have completed and the current phase that looks to resemble ‘Improved Earnings’.

So let’s look at each section in more detail.

The GFC and subsequent major low into March 2009 was the end of a primary bear market. As Dow observed, the final phase of the primary bear market is distressed selling and all those that hadn’t yet sold would have given up hope of a return to higher prices and started to exit positions. Around this time, well-educated investors would have been preparing to re-enter the market.

But how would they know the right time to enter?

Part of Dow’s research involved determining the patterns that signalled the end of one primary trend and the start of another. In the case of the start of a new upward trend, Dow observed:

“A new upward trend will be confirmed when the market doesnt move to a consecutively lower low and high”.

In other words a new upward trend, Dow Theory suggests is confirmed by higher lows and higher highs. It is the understanding of this simple insight that separates successful traders and investors from the not so successful. By implementing this simple technique for trend transition you will be in a far better position to profit from a trade and your results will improve dramatically.

You will see in the chart above I have marked the first instance where a higher low was confirmed (first purple box) suggesting that the market was returning to an upward trend. This could also be considered the start of the first phase in a primary bull market – increased confidence

A secondary reaction into the 2011 low (Point B, second purple box) followed the peak of the first phase in April of the same year. Notice how this low took out the prior significant low at Point A. Some may have taken this to be a return to a primary bear market given the energy of the pull back. Yet the accumulation into Point C (notice again the consistent higher lows and highs during this smaller run) suggested that a return to higher prices was likely. Smart investors would have seen this and begun buying top quality companies.

As we can now see the market has traded significantly higher and has since broken the April 2011 high, travelling in what appears to be Phase 2 of the primary bull market – improved earnings.

As you can see, by simply being able to recognise the direction of the market and by understanding century-old, tried and tested methodologies for market phases, you too can become the profitable investor you want to be.

If you have any questions feel free to email info@dalegillham.com  or write your question in the comment box below and we’ll get back to you shortly.