You can make money when markets are going up. You can also make money when markets are falling. And believe it or not, there are ways of making money when the market is moving sideways or doing nothing at all.
The catch?
You need to have a view on where the market is headed.
How can you determine market direction?
Here I'll show you my top three trading tools to help give you some ideas.
Now, the way I chose to trade isn't for everyone. I prefer to trade quality companies which are trading at cheap multiples, showing signs on the charts that there is strong demand.
I like to look at economic conditions, fundamentals of the stock as well as using technical analysis or charting.
So what should you look for?
I'm going to start by looking at economic conditions because it is the one thing that many traders overlook.
Low interest rates are one of the most beneficial conditions for the sharemarket. It encourages movement from cash to more risky investments. If the cost of borrowing is lower it encourages growth. This impacts valuations because the risk-free rate is lower.
Conversely, rising interest rates make it more difficult for companies to grow.
There are other indicators to look at as well. The economy moves in cycles and the troughs and peaks (highs and lows) are often defined by the unemployment rate. This is a lagging indicator but has the benefit of helping you define the highs and lows.
So it's useful to understand where we are in the economic cycle using unemployment rates.
Take a look at the graph below:
For almost 30 years you can see that, generally, falling unemployment is good for the market.
Sounds basic I know, but it's amazing how the basics are often overlooked for more complicated, difficult and often less meaningful concepts.
It's important to know what a company does and what profit it makes as well as how much its profit grows.
If you think about the sharemarket as a market full of businesses, you can see that some businesses are great and some are simply dreadful. If someone knocked on your door and asked you to invest $20000 into their business, there would be many questions that you'd probably ask before you opened up your wallet.
Yet when it comes to the sharemarket, often investment decisions are made without more than a couple of minutes thought or on the back of a tip.
So it's important to answer a few important questions, like 'what's the underlying business' and 'why is it a good investment?'.
Finally, there are psychological aspects to the sharemarket. You might not know what moves the market but you can see how the market moves.
This area is called charting or technical analysis.
Being able to read the charts helps you read the optimism or pessimism of the markets.
This is important, because if the dominant market vibe is optimistic, then a rising tide tends to lift all ships and almost all stocks tend to rise. That optimism or pessimism is often also called greed and fear.
At the moment, the Australian sharemarket looks like it has gone past a significant psychological barrier of 4350. The key here is that we've seen a definite break of that level and now we need to watch and see if that holds.
Volumes have been improving which is a positive sign. The pain may not be over but in the short-term, things are looking good.
So, if you can determine market direction using strategies or tools like the ones I've outlined, you might just be able to profit no matter what the sharemarket is doing.
Follow my sharemarket updates on Twitter: http://twitter.com/belldirect
Happy investing!
Julia Lee Equities Analyst Bell Direct
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