Should I Buy Red or Green Stocks?

PUBLISHED Mar 22, 2022, 7:59:32 PM        SHARE

imgChas Johnson

Should You Buy red or green stocks?

You should never buy a stock based on the color of a stock alone. Typically, a stock that is green indicate it is increasing in value today. A red colored stocks is going down today.

The Trend is Your Friend?

Research indicates that momentum strategies can outperform the market. This strategy buys stocks that are going up in the last 12 month period and sell stocks that have performed poorly in the last 12 month period. These strategies capitalize on companies with strong cultures performing consistently month after month and the movement of capital to a few key winners in the market; however, there is no consensus on why momentum strategies work. However, there is clear evidence that daily changes in a stock is in line with random behavior, with the caveat that the kurtosis of the daily random motion of a stock is poor with large tails indicating significant moves up and down are more common than should occur randomly. This bias towards larger moves up and down may also be the reason that momentum strategies show indications of being an effective strategy.

Why You Should Not Buy Based on Daily Change

You should not buy a stock because it is green or red because there is no correlation between the daily change of a stock today and its future movement tomorrow. The distribution of a stocks daily change can be modeled as random motion with bias towards extreme movements up and down. Even though a stock's daily price movement is bias towards more extreme upwards movement, there is no indication that a big price move today predicts a big price move tomorrow.

What does Green and Red Mean in Candle Stick Charts

Candlestick charts show green if the stock went up in a given period and red if the stock went down in a given period. The "wicks" of the candle sticks show the high and low prices during the period. The period is typically five minutes and one day. Candle Stick charts are heavily used in technical analysis to identify trading patterns in day trading. Identifying patterns in technical analysis can be very profitable, but the simple plan of buying when the candle sticks are green and selling when the candle sticks are red will not yield consistent positive return. check at Tom Hamilton's analysis using technical analysis to learn more about interpreting technical chart patterns.

Guidance for Beginning Investors

For new investors, it may help to check out our article on LINK"tips and information for investing for beginners" as well as our LINK "ultimate guide" for beginning investors. Even though investing depending on a stock's color is discourage, here are some tips for new investors:

  • Buy stock in companies that you know
  • LINK "It is Worth buying less than 1 share of stock"
  • LINK "Buy stocks when everyone else is selling"
  • Dividends are typically quarterly payouts to investors for owning stock. Get some dividend stocks

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