On fighting the tape as an investment
This being more of an investment thread than a trading one, I thought to share my method of madness.
First of all, if you are going to fight the tape on something as an investment, it'll have to be something that you believe in and you will be happy to keep buying it at lower prices. Otherwise you are likely to sell out while it is down or as soon as you break even without realizing your gains.
Secondly, it will have to be a sound business or an ETF that can ride out the storm. For example I am pretty comfortable predicting that XLP is not going to liquidate, but I can't make the same bet on marijuana ETFs.
Now that we have the prerequisites at hand, let's move the mechanics.
Say that you believe XBI will be a good investment over the next 5 years. Looking at the historical patterns, you decide that $100 is a good entry. The plan is then to buy at 100 and double the order size for every 20% drop. Then a final doubling once you get a 20% gain. Suppose that the bottom is reached at 40, for 60% drop from your entry which was already a substantial drop from the top. So:
1 share @ $100
2 x 80
4 x 64
8 x 51
16 x 41
At this point you have 31 shares for a total cost of $1,580, or average cost of $50.97. Now the bottom is reached. Wait until it moves off of its base and shows a 20% gain at ~61.20. You have made 20%, and it has moved up ~50+% off of its bottom. You can now optionally double down one last time or just ride it up. The 50% gain from the bottom means that it should have a following now who want to join the party.
So why would you do this instead of waiting for it to bottom and then jump onboard? The short answer is that stocks often move in sharp bursts rather than smooth trends. So you don't know where the bottom is and miss it...or you may wait for a pullback that never comes...or you may not have the money to invest at that time. And so on and so forth. Plus there are tax implications. IF, you believe in the stock (or the fund) and have a 5 year horizon, *and* you see it as a good value, then this is a good way to build a position.
This approach also works with strong cyclicals. Start accumulating in the bottom third or quarter of the cycle because once the up cycle is on the horizon, you are likely to miss your chance.
Again, it is important that you are confident about your investment and that it is already representing a good value. And it is equally important that you start small. You can always add to it on the way up, but not if have already bought too much. So don't fall in love with it and load up prematurely. |
