Trading can be simple when you you apply the stocks and crypto relativity trading strategy discussed in this article. Learn an easy way to know when to buy and when to sell stocks, crypto, and more.

Trading stocks and crypto has become increasingly popular in the last few years. That’s hardly surprising given how easy it is to trade stocks and crypto in this day and age. And to top it off, stocks and crypto prices seem to defy gravity, as they continue their upward trajectory. This bull market has been relentless.

Although most traders look like geniuses when trading in a bull market, the reality is that most people lose money when trading. Or at a minimum, most people underperform the major indexes when trading. Eventually a large majority of traders learn that a buy and hold strategy usually overperforms trading.

Why Do Most Traders Fail To Outperform The Market?

The average trader lacks the emotional maturity and discipline to be a successful trader. Instead of trading with a specific strategy, people tend to be driven by their emotions. Consider the terms “fear of losing missing out” (FOMO) and “you only live once” (YOLO), that have become so popular lately. In addition, people tend to follow the hype. It only takes one celebrity or influencer to tweet one or two words, for the heard of traders to rush to buy.

Keep in mind professional traders are not only experienced and skilled, but also utilize a vast number of tools and strategies to trade. Most of these strategies are complex, often involving hedging and options trading. It is unreasonable to expect the average investor to understand, let alone practice some of these complex trading strategies.

The Stocks and Crypto Relativity Trading Strategy

This is where the stocks and crypto relative trading strategy comes into play. The relativity trading strategy is as simple as it gets, yet effective. I came across this strategy years ago when I first started studying the writings of contrarian and speculator Adam Hamilton, from Zealllc.com. Adam has an amazing ability to make complex subjects easy to understand.

Everybody knows, stocks go up and down, regardless of the general trend of the market. This is ebb and flow in the markets is a reaction to overall investor sentiment. When the predominant sentiment in the market is greed, investors will push stocks up to a point where stock prices are unsustainable. Soon stock prices begin falling causing the predominant sentiment to change from greed to fear. This further accelerates a market decline to the point that stock prices become unsustainable low. That’s because at such prices stocks are trading at bargains prices and keen investors start buying. Soon stock prices begin climbing again and the cycle repeats.

Price Movement Analogies

Think of this ebb and flow in the markets in similar terms as the ebb and flow of the ocean. Ocean waves are pushed forward by large masses of water until they reaches the shore, at which point these forces begin to dissipate. Soon the water comes to a stop, reverses direction and begins retracting gaining speed and momentum. Eventually this receding mass of water reaches a point at which it can no longer move against a bigger mass of water. And the cycle repeats.

Or if you prefer, think of a pendulum oscillating upward, carried by its momentum. At some point gravity overcomes momentum and the pendulum slows down as it reaches its highest point. Then the pendulum begins traveling downward, assisted by gravity. At this point the pendulum gains speed swinging pass the bottom and begins swinging up again. I think you get the point.

Smart people can figure out with certainty when a pendulum will reach its highest point. That’s not the case with the ocean or the markets. Although no one can precisely define the point at which the ocean waters begin to recess, through observation, we can definitely outline a general area where this will occur. The same thing can be said about the markets. No one can precisely forecast where prices will hit a high or a low, but we can get a general idea and therefore significantly improve our probabilities of making money.

How Do I Know When to Buy or Sell a Stock or Crypto?

As everybody knows, the key to making money with stocks or cryptocurrencies is to buy low and to sell high. To know when to buy or sell we need a point of reference. Something to compare the current stock price to. Adam Hamilton concluded a good point of reference is the 200 day moving average.

A stock’s 200 day moving average (DMA) is the stock’s average closing price over the last 200 days. The 200 DMA is commonly used to determine the general market trend. Think of the 200 DMA as the point of equilibrium in our pendulum analogy. This is the point at which the pendulum would rest if it wasn’t traveling due to momentum.

When it comes to stocks and crypto, you can think of the 200 DMA as the point to which stock prices wants to return to after reaching a high or after reaching a low. However, stock prices never stop at the 200 day moving average. Instead prices have a tendency to go well past the 200 DMA until they are either overbought or oversold.

The stock and crypto relativity strategy we discuss here uses the 200 DMA as its point of reference. However, traders could choose a 100 DMA, a 50 DMA, or something else. For our purposes, the strategy is as simple as dividing the stock price by its 200 day moving average price.

Stocks And Crypto Relativity Trading Examples

S&P 500 Stock Relativity Trading

Let’s dive into some practical examples. This week, the S&P 500 closed at $3,842, and its 200 DMA ended the week at at $3,472. If we divide $3,842 over $3,472 we come up with a stock relativity trading number of 1.10. This means the S&P 500 is trading 10% higher than its 200 DMA.

But how do we know if 10% over is too high or too low? All we need to do to answer this question is to come up with a reasonable range based on past performance. The chart below shows the times when the S&P 500 reversed directions to the point that the price went back to its 200 DMA. In 4 of those instances the S&P 500 crossed the 200 DMA to go from either overbought to oversold or vice versa.

The red circles in the chart show a few instances when the market was overbought. The green circles show two instances when the market was oversold.

Based on the chart above, an investor could conclude that anytime the S&P500 has a relativity trading value greater than 1.06, probabilities become high that the S&P500 will go down. Likewise, anytime the S&P 500 has a relativity trading value lower than 0.86, probabilities become high that the S&P500 will go up. The range from 0.86 to 1.06 is fairly broad and can be adjusted depending on the investor’s appetite for risk. For whatever is worth, Adam Hamilton’s range for the S&P is from 0.85 to 1.12.

In the chart above, I highlighted only 7 extreme relativity values. As such, an investor utilizing this trading range isn’t trading very much. As mentioned earlier, an investor that wanted to trade more frequently could utilize the stocks and crypto relativity trading strategy, with a 100 DMA or even a 50 DMA rather than the 200 DMA.

Finally, keep in mind this strategy can be applied to individual stocks.

Crypto Relativity Trading Example

The same concept can be applied to crypto trading. For this example let’s pick Bitcoin. As of this writing, bitcoin is trading at $48,182, and its 200 DMA sits at $23,445. If we divide $48,182 over $23,445 we come up with a bitcoin relativity number of 2.06. In the chart below you can see how this compares to prior overbought or oversold situations.

Although a relativity trading value of 2.06 doesn’t appear to be overbought territory, such value is within a short distance of a top. A patient investor would be wise to wait for a better entry opportunity. Such opportunities will present themselves, but you must avoid FOMO and YOLO trading tendencies.

Conclusion – Stocks and Crypto Relativity Trading

Trading stocks and crypto doesn’t have to be complicated. A simple strategy combined with emotional restraint can make a big difference when it comes to trading. The stocks and crypto relativity trading strategy presented here is as easy as it gets. The key is to not let emotions undermine the strategy.

As I mentioned earlier, I am convinced most traders eventually learn that being successful at trading is very difficult. For this reason, I prefer a buy and hold strategy. However, the beauty of the stocks and crypto relativity trading strategy is that it can be used to improve our probabilities of buying low and selling high even when pursuing a buy and hold long term plan. This is strategy is even more powerful when combined with a dollar cost averaging strategy. For more on the dollar cost averaging strategy read Mutual Fund Investing for Financial Freedom.

Please remember this is no financial advice. I am not a financial advisor. And as explained earlier, I prefer long term buy and hold strategies over trading strategies.

Happy trading!

JC Keen