Knowing When To Buy and Sell Stocks

There are many different strategies to use when you are investing or trading in stocks. The important thing is that you have a strategy and stick to it. It doesn’t matter whether you are a short or long term investor – discipline is the key to success after picking what stocks to invest in.

What you also need to understand is that there is no perfect system out there. Any system you use will have its limitations but at least if you have a system you have a set of rules to apply for knowing when to buy and sell.

A system I use regularly for knowing when to buy and sell stocks is based on 3 rules and makes the task of buying stocks easy to use and understand.

The 3 rules to the system are:

1. Only buy when the volume is above the long term average.

It’s important when buying stocks that you buy a liquid stock. That is a stock that you can sell easily when needed. To do that you need to make sure there is good consistent volume. Many investors will trade on volume indicators alone, particularly for smaller stocks as market announcements will often follow increased activity in volume. If you think this is insider trading, then you are right and its alive and well and happening every day at all different levels.

You will need a chart to apply this rule and all that is needed is to apply a long term average to the volume chart. If you are a short term trader then applying a 100 day average is a good indicator. The rule is to only buy when the price is above the 100 day moving average line.

2. Only buy when 3 consecutive higher ‘lows’ have been reached.

To apply this rule, you need a bar chart showing daily open and close prices. The great thing about a bar chart is the information contained in each bar. Each daily bar will have a high and low representing the high and low prices reached during the days trading. It also contains 2 horizontal dashes, one on the left representing the opening price and one on the right representing the closing price.

The rule to apply here is to only buy after 3 consecutive bars show a higher ‘low’. The low is the bottom of the bar, and not the lower horizontal bar or closing price. What we are looking for here is to only buy on an upward trend. The number of consecutive days can be changed to your preference but 3 days was also used successfully by Nicolas Darvis in his famous ‘box theory’ which he used to make over $2 million.

3. Only buy when the price is above the 100 day moving average.

The 3rd rule is to apply a 100 day moving average to you bar chart. A 100 day average is fine for most investors except perhaps for day traders who may want to use a shorter moving average.

Again, the rule is simple to follow. You only buy when the price is above the moving average. The idea is to only buy stock when they are in an upward trend. You do not want to buy when they are in a downward trend. That’s when you sell.

The rule for selling is also simple. In addition to the 100 day moving average you apply to your bar chart, you also include a 10 day moving average. This line will reflect any price movements faster than the 100 day line. The rule is to sell if the price falls below the 10 day moving average.

Remember, the secret to knowing when to buy and sell stocks is to be consistent in applying your rules and understanding that they will not work every time, but it’s a whole lot better than not having any system at all.


Rob Bourne has been involved in the financial services industry for over 35 years. As a practising financial adviser he focuses on the need for practical and down to earth financial education. The aim is to educate people through financial education so they can take control of their own financial future. Visit Rob's website here for more information on business opportunities, investing and financial education or the complete guide to superannuation a...

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