Many of my readers are asking me how to do long term trading? So, I created this guide for all of you, but I did a lot of research. Here are what I found.
Find a long term trading strategy that has an edge. Use value investing by Benjamin Graham, but do not use all the filters he used. Also, always screen stocks with high momentum in price.
Trading in the long term is suitable to grow your investment. Trades may stay open for months or even years to take advantage of the power of compounding.
Buy and hold strategies has reduced commission costs, which eat the profits of an active trader. I was a day trader before, but I never do it anymore.
Long Term Strategy Edge
You must find a strategy with an edge. I like using Graham’s rules, but I do not use all of it. The filters he used were so strict, and you can’t even find a stock to buy.
Instead, I only use six(6) screens. Buying stocks below 10 times sales has helped me avoid expensive securities.
Next, we will talk about Graham’s rules because I know it is essential.
- An earnings-to-price yield at least twice the AAA bond yield.
- A price-earnings ratio of less than 40 percent of the highest price-earnings ratio the stock had over the past five years.
- A dividend yield of at least two-thirds the AAA bond yield. (4) Stock price below two-thirds of tangible book value per share.
- Stock price below two-thirds “net current asset value.” (6) Total debt less than book value.
- A current ratio of greater than two.
- Total debt less than twice “net current asset value.”
- Earnings growth of prior ten years at least at a 7 percent annual (compound) rate.
- Stability of growth of earnings in that no more than two declines of 5 percent or more in year-end earnings in the prior 10 years are permissible.
As you can see, the rules are so strict, and we don’t use all of it in our stock strategies.
Don’t just buy a stock because it fits on Graham’s rules. Buy stocks that are moving. Most traders fail due to the prolonged consolidation of the stock.
What will you do if the security does not move up?
Well, some traders use the 52 weeks high to determine momentum.
You can also use the leading stocks to find long term stocks to invest in.
Positions traders hold positions for a long time. One of the methods of finding these stocks has been looking for leading stocks for the past 6 months or longer.
Stocks that do not move is a waste of your time and money.
Divide your capital to ten. Do not buy more than 10 stocks to diversify your risks. The number of shares depends upon your capital. For example, 100k can be divided into 10k per trade.
Can I buy Penny stocks?
Yes, you can, but you have to limit the maximum number of shares to buy in a company. For example, if the average volume traded for the last 20 days is 100,000, only buy up to 10,000 shares. This strategy will help you get out of the stock fast.