You can invest safely and reap profits by using technical analysis such as relative strength momentum. Using this approach to make investment decisions helps to eliminate human emotion from the process and produce better results.
When we let our emotions get involved in financial matters we risk delaying or even making the wrong decision. Just because we love Disney World is not in itself a good reason to buy Disney stock just like having a friend in Brazil isn’t a good reason to buy the Brazil ETF. And if we already own these we can be tempted to hold on even when they go down because of our emotional attachment while our brain says sell, sell, sell.
Technical analysis helps to make picking what to buy and when to sell easier. In fact using an investment software program based on technical analysis can make the entire buy – sell process not only easier but more efficient.
The challenges with technical analysis are:
- What means of analysis to use
- Just technical charts
- Setting the analysis rules
Just saying technical analysis doesn’t explain the options. There are dozens if not more, means of analysis. Picking the right means can be a challenge. In his book, Smarter Investing in Any Economy, (temporarily out of print) Michael J. Carr heartily recommends some form of relative strength momentum after years of analysis and testing.
There are a variety of formulas and different types of relative strength analysis. Carr examines a number and explains their benefits and downfalls while ending up recommending:
- Relative strength momentum
There are other types of technical analysis, and any of these can seem daunting if you’re not a math wizard or CMT (certified market analyst) like Carr. However a good investment software program that is designed to just implement these types of analysis makes it unnecessary for anyone to know the math behind the formulas; especially if the program allows for back testing so you can easily see potential results.
Some of the other means of analysis include:
- Relative Strength Index
- Price Oscillation
- Moving Average
- Rate of Change
My examination of many of these means of analysis indicates that there is not one way, one analysis that always works best for everything, for all types of stocks, ETFs or mutual funds.
I have found that when investing in ETFs, relative strength momentum with or without standard deviation or Alpha produce the best results.
With stocks I usually find that relatives strength momentum or return, again with or without standard deviation, produce the best results.
For mutual funds, I have found that alpha, alpha with standard deviation or relative strength momentum give the best profits.
The settings for these means of analysis, however, differ according to the type of ticker symbols in the group that is being analyzed. I have never found one particular setting that works for all the different types of groups I have analyzed. This makes back testing imperative to find the best setting plus the best buy-sell rules and the best means of analysis for any group of funds, ETFs or stocks.
Using technical analysis in an investment software program is kind of like driving a car. You don’t really need to know how the transmission works or the engine, just how to push the right buttons to get to where you want to be, to realize profits and not crash or roll off the road into a canyon.