I previously mentioned that my strategy is to buy low and sell high. You’re probably thinking that you’ve heard that before. But what you may not have thought of is how I’m going to do that. You see, after observing the market for going on 20 years I’ve noticed some trends.
First, during bull markets like the one we’re in now. Not every day is an up day. Stocks don’t go up each day. You’re probably thinking, where I’m going with this, but let me elaborate. Stocks get beat up all the time in any market for a variety of reasons. Here are a few I’ve identified:
- Earnings come out quarterly and they don’t beat estimates and the stock gets beat up. Or sometimes they beat estimates and still get beat up, which makes no sense to me, but whatever. Then a few days later, it corrects to where it was before. For me that is a buying opportunity when the beatdown is over and the correction starts.
- Other events such as splits, mergers, acquisitions, etc. happen and stocks get beat up as a result. Then the corrections happen.
- Sometimes the market just freaks out for no apparent reason. I know the talking heads will say they know why, but do we really? How many times do the say, “ the market is down on____”? Did they ask the market? At the end of the day it doesn’t matter because it’s all just speculation. And I’m looking for a correction.
Those scenarios present buying opportunities to me. Specifically, I’d be looking for a correction to, or close to, the share price before the “beat up” event. So I’d buy after the correction starts, which I’ve defined as after the stock is up 1% from the recent low. From there I’d be expecting the stock to continue to go up.
Conversely, the exact opposite scenario arises. Where because of all the same reasons I detailed before and then some, the stock goes up. Go figure. Then it inevitably comes back down. Those are short selling opportunities. Same things applies here in terms of the correction. So after the peak it starts coming back down. At about 1% down from its peak, I short sell expecting it to continue to go down to the price it was before the event that caused the price to go up.
You’re probably asking why 1%. Analysis on my trading activity has shown that a 1% swing in the opposite direction of the recent trend usually indicates a turnaround. So that is what I’m banking on. So when all goes according to plan, my strategy will work in ANY market and in up/down days in ANY market.
As for closing my position, on the long side when I’m up .25% I set a trailing stop to preserve my gain. I don’t like holding too long and I avoid holding overnight as much as possible because I’ve seen many stocks tank. FROM EXPERIENCE!!! If the stock continues to go up past .5% I change my trailing stop to halfway between the last trade and the cost basis. I continue that throughout the day trying to maximize my gain. If my stop hasn’t triggered by the end of the day I sell at market close to lock in my gain. The opposite of the above applies in buying to cover on a short sale.
In the even the market moves against me I’ll hold to give it a chance to go up. If at the end of the day if the loss is minimal and I don’t feel good about holding it overnight I’ll cut my losses. But if the loss is more than I want to take and I’m optimistic of a turnaround I’ll hold. All things considered there have been times when stocks have gone very against me. See my history where I mention LCI, KORS and GILD. So what I’ve implemented to avert those huge losses is a stop at 3%. That way my loss will never be more than 3%. The expectation is that this is going to be the exception.
Now you know how this is going to happen. No fancy charts just the basic ones that show recent price trends. If I get fancy I’ll look at SMAs. No other technical analysis that has charts with things I can’t pronounce, much less define. That’s as far as it goes. There is also no in-depth fundamental analysis because I’M not going to be holding very long.
That’s IT Innovators!!! That’s my strategy. Let me know what you think so far in comments below.