Investing with Index
Investing Strategies I Professional Investing
For investing with index we use indices like Nifty 50, SS&P 500 etc. for creating a portfolio or basket of stocks to match the index used.
The basic strategy is to buy all the stocks in equal quantity as present in the index used like in Nifty 50 buy equal quantity of each of 50 stocks. Use trend to invest and index for diversification.
Trend Analysis focuses on three timeframes – short-term (days to weeks), intermediate-term (weeks to months) or long-term (months to years).
These are broad definitions and can be shifted down into shorter timeframes (i.e. short-term could be hours to days), but it is important to always be aware of the trend in three consecutive timeframes because they are interrelated, and actions must consider all three.
The longer-term trend is the dominant and most important trend, but the shorter-term trends can be where long-term trend changes can first be detected. In other words, the longer-term trend determines the strategic stance, but the shorter-term is where tactical moves are made.
Steps to Apply
To use this system simply select the trading chart of your benchmark index like Nifty 50 and apply trend analysis on it. The process involved identifying long term trend for investing and buying and selling the basket of 50 stocks on long term signals.
2. We will allocate our capital equally among all 50 stocks. We have explained it below in detail.
3. Now, we will apply long term trend analysis. Use EMA 21 line in monthly timeframe chart.
Asset Allocation: Suppose we have 1 lakh capital. Then divide this total capital into 50 equal parts for 50 stocks. It means 1,00,000/50 = 2,000 per stock. Now when creating the basket allocate only 2,000 to each of 50 stocks.
When to Enter or Invest: When Nifty 50 Index closes above this long-term trend line in monthly chart candle (21 period EMA line in monthly chart) then buy the complete stock basket and keep holding it until sell conditions occur or as per your risk-reward ratio.
When to Sell or Exit: If Nifty 50 Index closes below this long-term trend line in monthly chart candle (21 period EMA line in monthly chart) then sell your complete stock holdings and wait for entry again. In all other cases, you need not to worry about stock market.