The idea of “Buy on Signal” is simple, which means investors should only start buying once the chart or indicator shows a positive signal, and also apply a proper trailing stop method. In other words, investors should only buy a stock if the stock shows a potential formation of an uptrend. Nonetheless, for those aggressive investors, they can choose to pick stocks that are on the rebound, as short term trading, and this usually higher in risk, not suitable for conservative investors.
The Current Market:
Chart 1: KLCI chart from 14/05/09 to 3/09/09.
As indicated by A, the KLCI was resisted near the 1200 psychological level, and entered a consolidation, forming a short term downtrend line L1. Fortunately, the Bollinger Bands was contracting, thus suggesting that the KLCI short term downtrend has temporary paused, and is now consolidating for yet another new movement.
Meanwhile, the KLCI is still supported by the 14, 21, 31 EMA, which is a longer term support line. This suggests that the KLCI long term trend is still positive. In other words, provided that the KLCI is still supported by the 14, 21, 31 EMA, there is still a chance for the KLCI to resume its uptrend. In order for the KLCI to resume its uptrend, it must break above the L1 downtrend line with the following criteria:
(1) Volume breaking and maintaining above the 40-day VMA.
(2) The Bollinger Band re-expansion with the KLCI above the Bollinger Middle Band.
Practical Case Studies:
Below are 3 KLCI component counters for this week's case studies, let's examine how one should "Buy on Signal".
Chart 2: AMMB - 1015, chart from 14/05/09 to 3/09/09.
As shown on chart 2, AMMB price formed T1 short term downtrend line, suggesting the short term movement is on the negative side. However, the Bollinger Bands is contracting, and therefore, the short term downtrend is temporary at a pause while consolidating for a new movement. If price of AMMB could break above the T1 line, with substantial volume increased, it would have a chance to break away from the short term downtrend movement.
Meanwhile, investors should monitor the Bollinger Bands to confirm the next signal. If the Bollinger Bands should re-expands with price above the Bollinger middle band, it would be a buy signal (As indicated by A), and the first cut-loss point is at RM 4.00 level. On the other hand, if the Bollinger Bands should re-expands with the price of AMMB remains below the Bollinger middle band, it would be a sell signal.
Chart 3: Genm - 4715, chart from 14/05/09 to 3/09/09.
As indicated by A, price of GENM rebounded on Thursday (3/09/09), breaking above the T1 short term downtrend line. This suggests that it is breaking away from the downtrend movement,. Meanwhile, as price of GENM is breaking above the T1 line, the Bollinger Bands also expanded, with price of GENM above the Bollinger Middle band. This suggests a bullish signal, with a first cut loss point at RM 2.70 level. If the Bollinger bands should continue to expand with price above the middle band, the bullish biased movement of GENM is expected to continue until the Bollinger bands should contract again.
Chart 4: Maybank - 1155, chart from 14/05/09 to 3/09/09.
As shown on chart 4, Maybank price is testing the T1 short term downtrend line. If price of Maybank could break above the T1 downtrend line, it would break away from the downtrend movement. However, it does not mean that it would form an uptrend, unless the Bollinger Bands re-expands with the price of Maybank above the Bollinger middle band. Nevertheless, if the Bollinger bands should expands with price above the middle band, it would be a buy signal, with a first cut loss point at RM 6.10 level. and of course, the buy signal has to be confirmed by a substantial increase of volume.
Transition in becoming a professional investor:
After reading the above case studies, investors might feel confused, for the idea of "Buy on Signal" contradicts with the basic fundamental of 'buy low sell high'. To most investors, it is not natural, thus harder to accept. In the process of learning, investors feeling confused is because he or she has not found his or her own style of investing, (aggressive or conservative, long term or short term). It is the worst thing for investors to chance his or her mind set from a short term investors to a long term investor after making a loss, and refuse to cut loss. As a result, they are holding on a losing positions, even until the loss is unbearable.
To break away from the average mind set of "Buy low, sell high", investors must break above the bottle neck, and the transition from an average investor to a professional investors is unavoidable; just like going through elementary school, and eventually graduating from College. There is not crash course, nor easy money making course to make you a successful investor, it requires time, efforts, and lots of studies, and a correct mind set and attitude, not to mention the experience, and then, only will he or she has a chance to succeed.
Conclusion:
To become a professional investor (or trader), investors must patiently waiting for the signal, and only "Buy on Signal", never buy too early because of the price is low. Finally, with a proper attitude and careful trading plan, together with the skill of analysis while following the broad market trend, and at the same time, knowing one's own trading position and objective, you will be on your way to becoming a professional investor one day.
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