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Investing Strategies

Investing Strategies – Growth vs. Value Investing

There are many numerous investment strategies available to investors and in today’s article we will discuss two types. Growth investing and value investing are both strategies that look at a stock’s intrinsic value in order to make a profit in the stock market. Today we will take a look at both investing strategies and see how they are different as well as how they are used to invest in stocks.

Growth investing occurs when the investors look for stocks that they predict have the potential to grow. More specifically they look for a company whose stocks are expected to grow at an above average rate when compared with other companies in the same industry. Also referred to as a capital growth strategy because investors opt to maximize their capital gains, growth stocks do not typically pay out dividends. Growth companies will typically reinvest retained earnings (dividend reinvestment) into capital projects. Investors must watch to be sure that a growth company’s stock is not overvalued.

Value stock investing is one of many investing strategies and it occurs when the investor looks for stocks that they believe the market has undervalued. These value investors look for stocks that trade for less than their intrinsic value or in other words, have lower than the average price to earnings ratios and/or high dividend yields. These investors pay special attention to the news and make a profit on deflated stock prices that occur as a result of the markets overreaction to good or bad news.

(The price to earnings ratio gives the valuation of a company’s current share price compared to it’s per share earnings. To find this ratio you take the market value per share and divide it by the earnings per share. A high P/E suggests higher earnings growth in the future compared to those companies with a lower P/E.)

When researching investing strategies dealing with value and growth investing you will come across GARP. GARP stands for Growth at a Reasonable Price. This strategy is the combination of growth and value investing and the investor looks for consistent earnings growth above market levels while excluding those companies that are valued very highly. When investing in stocks using GARP the investor will invest in stocks that are growth oriented and have pretty low price to earnings ratios multiples in normal stock market conditions.


Market Direction:The bullish trading on Wednesday had the potential of altering the market trend analysis. For the past few weeks, the Dow has been in the process of forming a Dumpling Top, a slow rounding top pattern. This eventually leads into a strong downtrend. The advantage of knowing what the candlestick patterns are revealing also provides knowledge of what a trend will do if a pattern is breached. The strength in the trading on Wednesday broke the trajectory of the current dumpling top pattern. Unfortunately Thursday's trading did not provide the follow-through bullish evidence needed to be assured the rounding top pattern had been broken.

Today, the Dow has formed a Doji. The NASDAQ has formed a spinning top. Both of these signals provide the opportunity for the bears to start taking control. Weakness from these levels would put a dumpling top formation back into contention. There is a trend line that can be drawn above the recent tops in the Dow as well as the NASDAQ. A close above that trend line would greatly eliminate the prospects of a Dumpling Top scenario. Why is it important to be able to identify when a pattern is not in effect anymore? Signals and patterns are created by the development of investor sentiment. A breach of that pattern or signal represents a completely different investor attitude. This information is very valuable to the investor that wants to have a clear understanding of what is occurring with current price trends. There are many positions that have been established over the past few weeks that are consistently moving up but are now in the overbought condition. The probabilities of the continuation of those trends are predicated on the attitude of investor sentiment. A Dumpling Top reveals a slow deterioration of bullish sentiment. That allows investors to be better prepared for when to take profits in existing positions.

DOW

Being able to identify a change of investor sentiment, the breach of the Dumpling Top, allows an investor to take advantage of new bullish opportunities. The major advantage of candlestick analysis is the understanding of what specific price moves should create as results. This is what dramatically reduces the emotions that usually cause losses. The better one can analyze the direction of the markets, the better the rational establishment of positions. The term 'rational' is very important when it comes to investment decisions. Reducing the emotions when identifying the continuation or the end of a price trend allows for much better exit strategies.

The common sense investment perspectives of candlestick analysis is the step-by-step process of evaluating the direction of the market, the direction of specific sectors, and finally the direction of individual stocks in those sectors. When this can be done with much greater accuracy, more rational decision-making can be made when it comes to taking profits.  Currently, the Candlestick Forum is running a special on the Five-star Trading program. This package of training videos includes the common sense applications of stop losses, the correct entry and exit strategies, the projection of price targets as well as other aspects of investing that keep investors from having to make emotional decisions. The mechanics built into candlestick graphics dramatically improved investors trading abilities. When you can graphically see what is going on in investor sentiment, the decision-making processes become greatly improved.

NUAN

The trend is your friend! Knowing what indicators have made that trend successful is a valuable tool for knowing when it is time to take profits or continue to hold. The use of candlestick signals in conjunction with other indicators makes for a very simple trading program that allows investors to make the correct buy decisions and sell decisions. Candlestick analysis is not voodoo economics. It is the recognition of the reoccurring thought processes that the majority of investors goes through in specific parts of a trend. This information is not hard to understand once you have dissected the point-by-point elements involved with price movements. Utilize the information built into candlestick signals. It is the most logical and comprehensive study of investor psychology in all of investment history.

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Good investing,

The Candlestick Forum Team


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