Just like you use a GPS to guide you when you are driving, you need tools to help you navigate when you are investing. I have found stock charts to be especially useful for this purpose.
Price & Volume Charts
All stock charts are based on two pieces of information. The price of the stock and the volume at which the stock traded in a specific time interval. For example if you look at the daily chart of Apple below you can see the open price of the stock on any day, the high and low prices the stock traded that day and the final closing price of the stock when the trading ended. You can also see how many units of the stock were traded (trading volume) that day.
Momentum Indicators
Many indicators can be charted using the price and volume information to decide when to buy, sell or hold a stock. This is called Technical Analysis. I have found two indicators to be simple, useful and reliable to base long-term buy, sell and hold decisions on. These are Simple Moving Average (SMA) and Money Flow Indicator (MFI).
SMA and MFI indicators provide a sense of the momentum of a stock. If the stock is rising or falling. The goal is to capture 80% of the stock’s move in any direction. You will never know exactly when a stock peaks or hits bottom. But you will have some guidelines to decide when to enter and exit an investment without significant loss and high probability of profit.
Simple Moving Average (SMA)
A simple moving average is calculated by adding recent prices and dividing that total by the number of time periods in the calculation. For example, a 20-day SMA is calculated by adding the closing prices of the stock over the last 20 days and then dividing the total by 20.
Money Flow Indicator (MFI)
A money flow indicator is a technical oscillator that uses price and volume for identifying if a stock is overbought (price on the high side) or oversold (price on the low side). The oscillator moves between 0 and 100. Generally, an MFI reading above 80 is considered overbought, and an MFI reading below 20 is considered oversold. Stocks that are overbought are likely to pull back on price in the near term, and those that are oversold are likely to increase in price in the near term. You can find formula for calculating MFI on Investopedia https://www.investopedia.com/terms/m/mfi.asp.
Time Period
The SMA and MFI indicators can be calculated using the stock’s daily closing prices, weekly closing prices or monthly closing prices. After many years of observation, I have found the monthly time period the most reliable for long-term buy and sell signals.
SMA and MFI Signals
I use SMA 20 monthly indicator to determine if a stock should be bought or sold. A trader named John Bollinger did extensive research and determined that the 20-day time period was ideal to calculate the SMA on which his Bollinger Bands were based on. While the explanation of Bollinger Bands is beyond the scope of this blog, you can find more information on it on Investopedia https://www.investopedia.com/terms/b/bollingerbands.asp
Bollinger Bands are mostly used for short-term trading. Since my goal is to use charts for long-term investments, instead of using the 20-day period to calculate the SMA, I use the 20-month period.
I use MFI 50 monthly indicator to determine if a stock should be bought or sold.
You can see the table and chart below to determine the buy and sell signals.
I have arrived at these signals based on many years of empirical observation. I encourage you to test them on your favorite stocks to make sure they work for you as well.
Buy / Sell Signals
| Investment Guideline | Price Above SMA 20 | MFI Above 50 | Price Below SMA 20 | MFI Below 50 |
| Buy | Yes | Yes | No | No |
| Sell | No | No | Yes | Yes |
| Hold* | Yes | No | No | Yes |
| Hold* | No | Yes | Yes | No |
Hold* – If you don’t own the stock, don’t buy it. If you own the stock, don’t sell it.
Chart with Buy / Sell Signals
You can see how well these Buy / Sell signals worked during the 2008 market crash.
Caution
These guidelines are empirical. There is no guarantee they will work in the future or for a specific stock. They work best over long periods of time and should not be used for short-term trades.