Are you an aspiring investor looking to navigate the complex world of financial markets? Do you find yourself overwhelmed by the vast amount of information and lack a structured approach to analyze markets? Fear not! In this comprehensive guide, we will introduce you to a powerful and engaging concept known as the “Rule of Three” and demonstrate how it can introduce some factual data in your investing methodology (in a well structured way). The “Rule of Three” methodology is proprietary, the result of nearly 2 decades of hard work. We use this methodology in our Momentum Investing stock market service, but it’s also the basis for our crypto investing research service which has unique elements (it is also the first in the world since early 2017). It goes beyond forecasting, which is a different skill; it is an investment methodology.
By the end of this article, you’ll be equipped with the tools to make informed decisions and embark on your investment journey with confidence and a little laughter along the way.
Note that the Rule of Three methodology includes all of the timeless and boundless investing tips we have documented in 100 Investing Tips For Long Term Investors and our 1/99 Investing Principles.
Understanding the Rule of Three
The Rule of Three is a simple yet effective principle that applies to various forms of communication and problem-solving. It suggests that information presented in groups of three is more engaging, memorable, and effective. So, how does this concept relate to investing, you might wonder? Well, imagine it as a triangle, with each side representing a crucial aspect of your investment methodology.
Side 1 of the Investing Methodology: Understand context by analyzing leading indicators, doing sector analysis, and individual charts
The first side of the triangle involves understanding the context and trend of the market you are interested in. Consider three vital aspects:
- Leading Indicators: These are like the breadcrumbs that foretell future price movements. Every market, every sector, every stock, every commodity, every cryptocurrency has leading indicators. Examples include the US Dollar, Yields, Indexes like the S&P 500 or small caps Russell 2000. By monitoring three relevant leading indicators, you can anticipate potential trend reversals or continuations, putting you one step ahead of the crowd.
- Sector Analysis: Just as a detective seeks clues, analyzing three key sectors closely related to your market provides invaluable insights into overall market health and sentiment. This broader perspective can help you identify lucrative opportunities and potential pitfalls.
- Individual Market Chart: Think of this as your treasure map. Focusing on the specific chart of the market you’re eyeing is critical. Evaluate price action, patterns, and essential support/resistance levels to make informed decisions. Stay away from most technical indicators, they tend to confuse you, and above all they are lagging. Look at the chart, try to understand positioning by carefully analyzing supply / demand dynamics which are, in the end, visualized in the form of a chart.
A few illustrations of our leading indicator analysis can be found here: This Leading Indicator Has A Summer Message For Stock Market Investors and Leading Indicators Confirming A Pullback Is Underway.
Side 2 of the Investing Methodology: Understand the chart and three ways to look at charts
The second side of the triangle involves analyzing the chart and its structures, forming the foundation of your investing methodology:
- Rising Structures: Upward price movements are like climbing the steps to profit heaven! Look for uptrends, bullish patterns, and ascending channels. Three rising structures confirm the market’s potential for growth.
- Declining Structures: What goes up must come down, right? Identifying downtrends, bearish patterns, and descending channels help you recognize when it’s time to say “goodbye” to a sinking ship.
- Horizontal Levels: Picture these levels as the stage for price performances. Key support and resistance levels, previous highs/lows, Fibonacci levels, and round numbers create areas of interest for traders. Analyzing three horizontal levels gives you a backstage pass to market sentiment.
A few illustrations of our chart readings can be found here: Why We Are Very Bullish On Junior Silver Miners (Chart Secret Revealed) and Markets Downside Target Reached – What Now.
Side 3 of the Investing Methodology: Understand the timeline by focusing on rising periods, falling periods, and volatility windows
The final side of the triangle emphasizes the timeline and recognizing critical turning points:
- Rising Periods: Picture this as a golden era of growth. Identifying three periods when a sector or market enjoys prolonged uptrends can unlock hidden treasures of investment opportunities.
- Falling Periods: Every adventure has its setbacks. By acknowledging three periods characterized by prolonged downtrends, you can navigate away from perilous market pitfalls.
- Volatility Windows: Buckle up for a wild ride! These periods of increased market turbulence create turning points. Keep a close eye on significant volatility windows, and which markets / sectors / stocks register a turning point vs. a regular ‘pull-back’ during those volatility windows. Similarly, leading indicators, the very first point in the first of the three rules, tend to send very important reversal vs. continuation signals during volatility windows.
A few illustrations of our timeline readings and volatility window analysis can be found here: Forecasting The Next Bearish Turning Point and Leading Indicator Of Global Markets Entering A Crucial Area.
Conclusion: Your Investing Methodology Unveiled
Armed with the Rule of Three and your newfound investing methodology, you’re well-equipped to embark on a thrilling adventure in the financial markets. Remember, investing success doesn’t come overnight. Stay patient, make well-informed decisions, and always keep an eye out for the unexpected.
The Rule of Three is not just a guiding principle; it’s also the number of jokes you might need to survive a day in the market. Happy investing, and may your portfolio be evergreen!
You can follow our work in Momentum Investing to understand how we track markets in this Rule of Three framework. Every week, we send out market insights to our premium members.
