Buying into dips during uptrend?

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hibikijoji

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Post Number: 310
Registered: 08-2005

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Tuesday, May 01, 2007 - 03:00 pm:

I'm currently testing this out with a trading simulation game Not sure if anyone has any comments in regards to buying into dips during an uptrend.

The system goes something like this:

1. Construct a portfolio with uptrend based stocks
2. Wait until near the end of the trading day
3. Buy into stocks that have a negative gain. Record buy price and quantity.
4. Repeat 3. by buying one batch more than the previous day until you have a positive gain day.
5. At the close of a positive end day, sell the batch that will be at a profit.

Of course, the risk implications by not having guaranteed stop loss is suicidal. Nevertheless, it seems to be an interesting concept.

An example to illustrate:

Day 1: Negative, close at 10c. Buy 1000 @ 10c = $100
Day 2: Negative, close at 9.6c. Buy 2000 @ 9.6c = $192
Day 3: Positive, close at 9.8c. Sell 2000 @ 9.8c = $196
Day 4: Positive, close at 10.2c. Sell 1000 @ 10.2c = $102

Total expenditure = 100 + 192 = $292
Net gain = (102 - 100) + (196 - 192) = 2 + 4 = $6

Buy and hold profit = (292/.1) * (0.102 - 0.1) = $5.84

Any comments?

ohkoolnutz

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Post Number: 563
Registered: 10-2005

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Tuesday, May 01, 2007 - 08:23 pm:

Does trading work under a FIFO basis (first-in-first-out) so that the lot you sell will match the first lot you bought no matter if it is the lowest or highest-priced quantity? If you buy equally sized lots can you cheat the FIFO system into a system where you can switch trading dates for tax advantages?

Day 1: Negative, close at 10c. Buy 1000 @ 10c = $100
Day 2: Negative, close at 9.6c. Buy 2000 @ 9.6c = $192
Day 300: Positive, close at 9.8c. Sell 2000 @ 9.8c = $196
Day 400: Positive, close at 10.2c. Sell 1000 @ 10.2c = $102

Total expenditure = 100 + 192 = $292
Net gain = (196-100-96)+(102-96) = 0 + 6 = $6

capital gain within 52 weeks: $0
capital gain outside 52 weeks: $6

Doubling down and unloading for break-even under the FIFO system would maybe lead to tax advantages by pushing the capital gain to the later sell and maybe into a 52+ week holding.

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ohk

Lies, Damn Lies and Technical Analysis

hibikijoji

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Post Number: 312
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Thursday, May 17, 2007 - 02:02 pm:

Done some research. In short - don't use this method as it is bound to failure according to 'Five Minute Investing' Author Braden Glett (http://invest-faq.com/fiveminute/)

It's been labelled as the The World's Worst Trading Strategy (http://invest-faq.com/fiveminute/chapter6.html).

The reverse of this is apparently better (See chapter 7).

Comments?

hilarius

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Post Number: 2255
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Thursday, May 17, 2007 - 04:01 pm:

The article discusses buying in downtrends

This has nothing to do with buying dips in uptrends

I come in peace to share my thoughts and to shine my candle light on possible long term opportunities

ohkoolnutz

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Thursday, May 17, 2007 - 05:19 pm:

I read his page on the Reverse Scale Strategy. It would work wonders if you picked the right stock. How many stocks out there keep doubling? How do you know which stock will behave in such way? How do you determine at which point comes the next decision point and how wide should they be spread?

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ohk

Lies, Damn Lies and Technical Analysis

hilarius

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Thursday, May 17, 2007 - 05:45 pm:

Stan Weinstein gives all the criteria and guidance for recognising Stage 2 uptrends ... far better than I could

Hilarius

I come in peace to share my thoughts and to shine my candle light on possible long term opportunities

hibikijoji

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Monday, May 21, 2007 - 01:55 pm:

@ ohkoolnutz :
How do you know which stock will behave in such way? How many stocks out there keep doubling?"
Braden makes the assumption that the future cannot be predicted. He focuses on risk and money management rather than focusing on indicators predicting future potential trends.

However, the article uses diversification and picks those who have momentum i.e. those who are at their all time highs.

He makes an interesting argument that top performing stock prices were likened to counting 1 to 100. He believes that you dont need to count 4-3-2-1 to reach to 100, but it would be necessary to go 1-2-3-4. Therefore, the Braden picks those that are on the all-time-high list.

How do you determine at which point comes the next decision point and how wide should they be spread?

Braden uses 30% accepted variance (volatility?) based on past experiences. Basically,

1. Buy into a share in your portfolio
2. Next decision point is 30% more than bought price
3. Sell all shares in stock when share price falls under one decision point

In general though, it's really how much you want to risk. If I remember correctly He uses a 3% stop loss system i.e. 30% variance/volaitility with 10% investment capital on each share (0.3 * 0.1 = 0.03).

The purpose of the Reverse Scale Strategy is to diffuse uncertainty, provide simple risk/money management and introduces the concept of portfolio management. It also focuses on planned entry + exits. In other words, he promotes stop losses and letting the profits run.

The advantages are that the majority of people can implement this without having a heart attack during the process. It's relatively stress-free due to more certainty. It's also easy to see that capital will be shifted to those stocks that perform. I don't believe that this strategy will give you the most profits, but for the effort put in, it's certainly a start

@hilarius:
Yes, Stan Weinstein's concept is simple yet effective.

I guess my original question is partly answered now - I need to have an effective portfolio management strategy for the "buying into dips during uptrend" system to work.