Financial Literacy - Growing your bottom line
Long-term investing strategies

Trends are movements across a chart that reflect prices going up, going down and staying flat.

"Trend is very similar to support and resistance, except it is an angled version of a support or resistance line," says Anderson.

If investors believe a stock will continue going up at a particular rate, there is a moving line that the price will not cross on the upside and the downside -- and the same for the reverse, if the trend is moving down.

The patterns formed on the charts can give investors information about what may happen in the future. A pattern is a recognizable picture formed by the price points plotted on the chart that may indicate future price movements.

For instance, some basic pattern formations are the head and shoulders pattern, and flags and pennants.

"The key though is indicators as well as chart patterns are only useful if you remember the context of the stock and you focus on what is this telling you about the psychology of the people who are in this market," says Anderson.

"Are they greedy? Are they fearful? Are they changing from greed to fear?" he says.

Market timing

The investors who sold out their equity positions during the recent market troubles were practicing market timing, perhaps unwittingly. In time, their timing will prove to be bad, since they have locked in their losses at the worst possible time. History shows that markets do rebound -- eventually.

And while they sit on the sidelines waiting for the volatility to subside, investors often miss the opportunity to get back in the market in time to experience its positive moves.

But even professional traders often use either technical or fundamental analysis to time the market. In addition to studying price and volume data on charts or studying financial statements and the economy, they focus on something called the moving average.

A moving average calculation simply takes the daily closing price of an index or security over a certain period of time --100 days, 150 days and 200 days are all frequently used measurements -- and averages them.

From a market timing perspective, one technique for buying and selling stocks involves acting when a particular stock price crosses the threshold of its moving average.

"All you do is ask: Is the price above the moving average? If it is; you buy. If it is below, then you sell," says Dennis Tilley, director of alternative research at Merriman Berkman Next.

It results in a lot of trading because the price can bounce back and forth, Tilley says.

Frequent trading leads to higher costs for investors, in transaction fees as well as taxes, if you trade in a taxable account.

Pick a plan

Though fundamental and technical analyses as well as market timing can pay off for hyper-disciplined investors with the time and commitment to watch the market, fans of index funds are quick to point out that after taxes and expenses, no-load index funds beat active strategies most of the time.

"There's a chance to look like a genius if you're one who invested in Google's IPO or such -- mutual funds aren't going to do that for you," says Newhall. "But no one hears about the stock that went nowhere -- or to zero."

"There are so many stories of individuals who get in and think they know what they're doing and ultimately they are only buying a handful of stocks and maybe they are all in the same sector. So really there is insufficient diversification," he adds.

In the end, investing is about managing risk while getting the best return possible. There are innumerable ways to go about it, from the deceptively simple to the mind-bogglingly complicated.

No matter which way you go about it, as long as it doesn't involve a dartboard and a blindfold, settle on plan you can live with and stick to it.


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