If you study stock charts, there are a kajillion indicators.
Meaning there are a bunch of ways that try and predict what the stock will do next.
The two simplest are moving averages.
One a fifty day, one a two hundred day.
The fifty day is “short term” while the two hundred is “long term.”
If the fifty day crossed the two hundred day on the way down, that’s a bad sign.
It means the stock is not only going down, but it’s picking up momentum as it’s going down.
On the other hand, if the fifty day crosses the two hundred day on the way up, that’s considered a good sign.
Not only is it going up, but it’s picking up momentum as it’s going up.
If you look at any stock chart over the past couple years, and look at the two different moving averages (50 day and 200 day) it looks like a decent signal.
Buy when they cross on the way up, and sell as they cross on the way down.
This is just one of MANY such indicators.
Pick two, a short term and a long term, and when they cross it’s time to buy or sell, depending on HOW they cross.
Implied in all of these indicators is the idea of reversion to the mean.
They are ALL based on past performance.
And these calculations based on past performance will hopefully predict future performance.
But they are all based on the idea that when a price of a stock moves too far way from where it’s been, it’s going to move back.
Reversion to the mean.
It’s been said that humans are scared, lazy people.
And everything we do is designed to make life easier (cause we’re lazy) and safer (cause we’re scared).
But sometimes we can go too far.
We can make life TOO easy and TOO safe.
And we lose our natural abilities.
To think, be creative, and take action when we need to.
Only a couple hundred years ago (which is a nanosecond compared to how long we’ve been around) getting food was a chore.
You had to do a lot of work to get something to eat.
Now you can push a couple buttons on your device, all while watching TV, and have something delivered.
They only “work” you’ve got to do is get up and answer the door.
While this is pretty cool, it’s also pretty dangerous.
Being too safe for too long, and having things too easy for too long can take away our edge.
Which can make it very hard to think creatively, so you can live a life far above average.
Luckily, shifting your mind back to your naturally creative self isn’t difficult.
The sooner you start, the better off you’ll be.