Is a Downward Trending Stock Investing Strategy productive? There’s a lot of misunderstanding about investing in stocks that are undergoing a downtrend. So let’s get to the bottom of how you should invest in stocks trending down.
Here’s what to expect:
In this blog post we’ll dig through some of the most common source of confusion about investing in stocks in a downtrend. And while each investing situation is unique, hopefully you can apply these general ideas to analyze downtrending stocks that you find suitable for investment.
So let’s start with the most common source of misunderstanding about investing in a downward trending stock. Okay?
What’s the Timeframe of your Downward Trending Stock Investing Strategy?
In the stock market, (as in life), everything is relative. When you’re talking about investing in a stock in a downtrend, you need to be very clear about your timeframe. I think this is the number one reason people make mistakes regarding buying stocks in a downtrend.
Let me explain:
When you read someone else’s opinion about a stock pick (whether it’s on Stocktwits, CNBC or in the news), you don’t usually hear about their timeframe. Stock market pundits are quick to make proclamations. But they don’t usually share much context.
After all, it doesn’t make for great headlines.
But the unfortunate truth is that when you’re talking about stocks you need to be thinking about timeframes. Are you trading a stock for a quick buck? Or are you investing in a company you love for the long-run? You answer to this question will more or less determine if a downtrend investing strategy is for you.
If you’re just going for a quick trade on the long side you probably don’t want to waste your time with stocks that are downtrending. In this case you’re looking for a quick return without taking on too much risk. While there is some value in looking for oversold momentum stocks, you’ll primarily be focused on buying stocks that are going up (with the hopes they keep going higher).On the other hand…
If you’re a long term investor with a multi-year time horizon then a downward trending investment strategy might be just what you need!
Curious to learn more?
How Investors Can Use Downward Trending Investing Strategy:
Long term investors are less concerned with immediate price performance. Instead they’re often focused on calculating intrinsic value of a stock and finding bargain-basement kind of deals. If this is the case for you, then looking for under-valued stocks near 52 week lows can be a great place to start your stock picking research.
Stocks are usually in a downtrend for a reason. And if you want to use this downward trending investment strategy you had better figure out WHY the stock is in a downtrend. If you do, and the reason doesn’t scare you, you might have a value investing opportunity on your hands!
That said, an investing strategy focused on stocks in a downtrend requires a lot of patience. Stocks can continue to trend lower over time. So it’s best not to jump in all at once. Instead of trying to time the exact bottom of the downtrend you can buy a couple hundred shares once a month, or every couple of weeks. By slowly committing to your investment thesis over time you can improve your entry price (and hopefully your eventual returns).
Hopefully this blog post has cleared up the major reason why there is so much confusing on investing in a downtrend, and if you should throw good money after bad. In short traders will probably want to stay away from downtrending stocks (except for the occasional oversold bounce)…. while investors with patience can slowly buy into downtrending stocks to secure an effective entry price into long term assets undergoing temporary hiccups. Make sense?
And By The Way: If you’re curious to learn a little more about how you can improve your approach to stock trading and investing you’ll enjoy my free ebook below. You can download it by entering your email address in the form below. And I’ll also send you my favourite tips and tools each week to help you conquer your corner of the stock market. Why not check it out?