When market volatility ramps up, it can be tough to pinpoint new investing opportunities. That’s where “trend rules” come in.
Charles Sizemore is my partner, co-editor of the Green Zone Fortunes research service I founded and a close friend.
He’s a self-described “value investor,” whereas the “Momentum Principle” is my go-to strategy.
With that setup, you might think that Charles and I never agree on anything.
In reality, that’s not the case.
In fact, I see Charles’ and my styles as complementary, more so than opposing. And our success is by no means mutually exclusive.
When I developed our Green Zone Ratings model, I included three “fundamental” factors for stocks: value, quality and growth.
Those fundamental factors are meant to balance out the other three, more “technical” or price-based factors that round out our model: momentum, size and volatility.
And even though I’ve relied solely on my momentum algorithms to run an options-trading service since 2012, I find myself hunting for value plays at deep discounts … and high-quality companies … and “growth” plays … as I’m deciding which stocks Charles and I will add to the Green Zone Fortunes portfolio each month.
And you know what … Charles does just as much work “across the aisle,” so to speak — looking for small companies (size factor) in strong trends (momentum) with smooth returns (volatility).
Charles even revealed a guideline he follows in a recent chat: “I’ll only consider a stock if it Green Zone Ratings momentum score is above 50.”
Of course, that made me super proud.
That’s a “trend rule.” And as a proponent of the Momentum Principle for over a decade now, I’ve preached on and on about the value of following even the simplest of trend rules.
For instance, your trend rule could be as simple as: “I’ll only consider buying a stock if the stock’s current price is above its 200-day moving average.”
Or, you can use our Green Zone Ratings model — available on Money & Markets — and a trend rule that targets a certain factor: “I’ll only consider buying a stock if its growth rating is ‘Bullish’ or higher.”
Financial markets are volatile right now, and trend rules can help with that. Just this week, Charles used our volatility factor to find a dividend stock that is made to weather the ups and downs of a rocky market. You can read about it here.
The Benefits of Trend Rules
A simple trend rule like this will do three things for you:
Benefit No. 1: Filtering
A trend rule will quickly narrow the list of stocks to consider and research further.
In my Home Run Profits options-trading service, I use a trend rule to isolate “Buy-Qualified” stocks and ETFs … and the rest, I simply ignore.
Charles’ dividend stock this week is another example.
Benefit No. 2: Better Odds
I’ve done extensive testing on the Momentum Principle, in general, and on trend rules, specifically. One of the biggest benefits a trend rule gives you is better odds on bullish trades.
I’m talking about your “win rate” here, which is the percentage of trades you make profits on compared to all the trades you make.
My research shows that if you only buy stocks that are in uptrends (however you define “uptrend), your odds of making a profitable trade are much greater than if you only buy stocks in downtrends.
Benefit No. 3: Less Risk
My research also shows that if you buy a stock that’s already in an uptrend and then, for whatever reason, the trade doesn’t end up working out … the size of the loss will, on average, be less than the average loss you’ll suffer if you buy stocks that are in downtrends.
Putting these all together … using a simple trend rule helps you stay focused on a smaller subset of stocks in the market — the ones that have better odds and less risk.
And to me, and Charles for that matter … that’s one heck of a combination. It’s almost a “no-brainer” to start with a simple trend rule when it can help you find high-probability plays, with less risk to boot!
As I mentioned, we make our Green Zone stock rating model available for no charge on www.moneyandmarkets.com.
And, of course, if you’d like more guidance from Charles and me, you need to consider joining us over at Green Zone Fortunes … where a modest fee will give you access to our model portfolio, monthly stock recommendations, weekly updates, and much more. Go here to find out more.
To good profits,
Chief Investment Strategist
Story updated on October 7, 2021.