How to Decide When to Get in or Out of the Stock Market
Most stocks move with the market so it makes sense to buy stocks when the market is advancing and sell them when the market starts to decline. The best method for determining market direction was devised by William O'Neill, the founder of Investor's Business Daily and author of the best-selling book "How to Make Money in Stocks."
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Instructions
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Watch the market daily. The market price and volume action is all the information you need to determine market direction, but it takes knowledge and practice to interpret what you see correctly.
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Buy when the market turns up. At some point a market that has been declining for a while stops going down, sometimes even despite the barrage of bad news and doom and gloom predictions. It happens because everyone who wanted to sell has done so and there are no more sellers left. Almost by default, a market that can't go down any more turns back up. Usually it happens on higher volume. O'Neill calls this the first day of a new rally attempt. It may still fail, so the key is to watch the market action in the next few days carefully.
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Look for another powerful market thrust upward on above-average volume on days 4 through 10 of a new rally attempt. If it comes, it serves as confirmation of a new rally. This is generally the best time to get back into the market.
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Sell when you spot distribution. Distribution means professional investors and institutions selling to retail investors. After a period of advance, stocks stop going up despite a barrage of good news and rosy predictions. The daily volume is usually very high as the investing public is excited about future prospects. Then the market sells off on higher volume---that's distribution. Five to six distributions days in a month will usually kill a rally, so it's the best time to get out of the market.
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Use the Dow Theory to determine overall market direction. The Dow Theory states that markets move in trends. An uptrend means a series of higher highs and higher lows; a down trend means a series of lower highs and lower lows. A change of direction from down to up occurs when a declining market refuses to make a lower low and instead makes a higher high--that's the time to get in. Conversely, the time to get out is when a rising market fails to make a higher high and makes a lower low instead.
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- Photo Credit pen showing diagram on financial report/magazine image by Anton Gvozdikov from Fotolia.com
