The Simplest Way to Trade the Stock Market
- Rohit Musale, CFA
- Mar 19
- 3 min read
My soul tells me that all good things are simple.
The art of trading is no exception.
If a professional trader simply decides to follow the trend,
and do nothing else,
he will be operating the most simple system of all.
They say, "Trend is your friend."
That statement is more profound than it sounds.
Just imagine,
You enter a stock at the perfect buy point coming out of a well formed base in an up-trending stock,
while the following equation holds true,
Price > 8 EMA > 21 EMA > 50 SMA > 150 SMA > 200 SMA
on the daily timeframe chart.
You are in what I call, "A super trending stock".
Because,
the price action has forced all the 3 types of moving averages to get properly aligned:
- Short Term (8 EMA, 21 EMA)
- Medium Term (50 SMA)
- Long Term (150 SMA, 200 SMA)
Lets just assume that you decide to keep things simple,
and choose NOT TO engage in complicated tasks like:
- Risk Management
- Trade Management
- Position Sizing
- Trading Psychology
- Money Management
And you simply choose to stay in the stock as long as the following equation holds true:
- Price > 8 EMA > 21 EMA > 50 SMA > 150 SMA > 200 SMA (Daily Timeframe)
Is this the perfect way to trade ?
Absolutely not.
Because,
it comes with pros and cons.
It will keep you in a stock as long as it is trending.
However, it might kick you out of the trade even on a "low volume minor pullback".
Sometimes, the price could break the 8 EMA.
Sometimes, the 21 EMA might break the 50 SMA
Sometimes, the 150 SMA might break the 200 SMA
Sometimes, you might miss very long uptrends simply because the price broke the 8 EMA and yet continued to trade above the 50 SMA for the next 13 months.
Can that happen ?
Ofcourse, it can.
It will.
It often does.
Either ways, your simple system will force you to come out, since our original equation is now violated.
- Price > 8 EMA > 21 EMA > 50 SMA > 150 SMA > 200 SMA (Daily Chart)
However,
do not underestimate the power of this simple equation
Example:
Sometimes, you might "find yourself in a super trend.
Example: IRFC breakout on 14 Dec 2023
If you had bought this stock on 14 Dec 2023, you would have made 85% on your money before our equation gets violated.
85% is not bad for a simple trend following system on a single trade.
That would help you finance so many, low risk trading opportunities.
Zooming out,
if you look at the big picture and follow this equation over a thousand trades, are you likely to do well in the long run ?
The answer is yes.
Because,
It will help you cut losses short and ride the trends as long as they sustain.
That is a mathematically rewarding system.
Some traders might argue,
"But by the time, the moving averages get aligned, may be its too late to get in."
That statement is mathematically and technically correct.
However, it is NOT TRUE for a series of 100 trades.
If you buy 100 stocks with moving averages aligned vs 100 stocks with moving averages misaligned, in which of these 2 scenarios are you likely to come out profitable ?
When you ask questions like that,
you get "perspective".
Moreover,
the IRFC example is a living example of what can happen when you find yourself in a super trending stock.
Trading is not about back testing.
Trading is about putting the odds of success in your favor.
Keep it simple. (if you want)
In the long run, it is the simple things that sustain and matter.
Regards,
Rohit Musale, CFA
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