Divergence trades represent a clear chart pattern of slowing price direction. At the same time they are countertrend trades and have a higher degree of risk. Before the October 1987 stock plunge, there were numerous divergence signals in the S&P, both long-term and short-term, and many traders posted losses trying to sell what might have been the top of the market. Most gave up before the decline. If, in fact, the greatest opportunities come when the divergence is strong, that is, the decline in the momentum peaks is large. then the best results will come from entering a short position, then holding that short when a long trend turns to a short one. By entering the trend trade early (and exiting the old long position), a divergence can become a large profit rather than a small one.
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Converting a Divergence into a Trend Trade
Sunday, December 6th, 2009SECURITY SELECTION
Sunday, November 22nd, 2009Finally, after deciding who will manage your investment, whether you will try to time the market, and the various asset classes you wish to hold, you must decide which specific securities to buy within each class. This is termed security selection.
For example, you might decide that you want 30 percent of your money in small stocks. This is an asset allocation decision. Next, however, you must decide which small stocks to buy. Here again there is an active strategy and a passive strategy. With an active strategy, we try to identify those small stocks that we think will do the best in the future; in other words, we try to pick “winners.” Investigating particular securities within a broad class in an attempt to identify superior performers is often called security analysis.
With a passive security selection strategy, we might just acquire a diverse group of small stocks, perhaps by buying a mutual fund that holds shares in hundreds of small companies.