Strategy 3 of 5: Buy Zone / Sell Zone

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This next strategy, called Buy Zone / Sell Zone, is an attempt to start timing the market without the stress of actually day trading. Remember, in my last blog post, I described my amazingly simple Value Cost Average strategy that takes just 10 minutes a month. This is where you buy 25% more a month if the price has gone down that month, and 25% less if it has gone up that month. Great stuff for ISAs and SIPPs.

Imagine doing that in a Junior ISA for 20 odd years. I wish someone had done that for me – so much so that I thought my children might appreciate it too. They both have SIPPS, which I started for them at the age of 3 months. I also opened up Junior ISAs, but don’t tell them that, because it’s legally theirs at age 16.

With the Pound Cost Average strategy and the Value Cost Average strategy in my previous blog posts we have not been timing the market, but ensuring that we have time IN the market. Much like Warren Buffet, we are accumulating over time, ensuring we never miss any of the big moves that can make such a difference to your portfolios.

With the Buy Zone / Sell Zone strategy you can look at it once a week or once a month – you decide. Once the stock price drops into a Buy Zone, it is time to start buying, and then when it goes up to a higher zone, it is time to start selling, because it’s in a Sell Zone! The Zones take all the guess work out of timing the market. It is brilliant in its simplicity, let me explain…

By setting the time span of your charting software to one year, as you can see in the chart below, the highs and the lows of that stock price.

You simply draw some lines at the top and bottom of the price range. The top line is called the resistance line or ceiling and the lower line is called the support line or floor.

You also add another line in the middle of these two lines. You now have an Upper Zone (top 50%) and a Lower Zone (bottom 50%).

All decent stock chart tools have the facility to draw lines over the top of the chart. One of the best & free stock charting software is Free Stock Charts.

If we just draw another line through the top half again (top 25%) and another through the bottom half (lower 25%), we have a diagram with 4 zones in, as you can see below:
Buy Zone Sell Zone Strategy Example
Now let’s think about what we are doing for a moment. With Price Cost Averaging (PCA) and even Value Cost Averaging (VCA), we were quite happy to put money into every one of those zones, even in the top zones. The reason was because we were not trying to time the market in any way, recognising that timing the market is easier said than done.

However, some of you might be asking yourselves, “Why oh why would you want to buy when the price is in the top half (Zones 3 and 4), especially when the stock is in the top quarter?”

The answer is – you wouldn’t!

This is where the Buy Zone – Sell Zone concept comes in.

I want to buy the stock when the price is in the lower half, say Zone 2 and buy even more when it is in Zone 1.

As you can see from the diagram above, you have the lower half, which is your Buying Zones, and you have the top half, which are your Selling Zones.

You want to buy in Zone 1 and when the price goes up to Zone 4 you want to sell this stock. In Zone 2 you should think about buying and in Zone 3 you should think about selling.

You can get quite creative here. For example, you buy £100 worth of stock when it is in Zone 2 and £200 when it is in Zone 1. You then sell 50% of the stock when it exits Zone 3 and enters into Zone 4 and the rest when it reaches the top of Zone 4.
Buy Zone Sell Zone Strategy Example
What does that mean?

It means that you are buying near the bottom and more at the very bottom, then selling some near the top and the rest at the very top.

In other words, you are starting to time the market, but without the stress of timing it to the second (that we leave for the next strategy in this series.)

This strategy is semi-automatic. You could look at the stock on a monthly basis and make a decision just once a month, acting on it whatever the price might be at that time. You could monitor it on a weekly basis, and make a decision more frequently.

However, with a tiny bit more effort you can start to time the market more by having alerts in place when particular zones are hit.

That way you only look at the stock when an email comes into your inbox alerting you that the price has moved into a new zone.

Why is this different?

Well in the example above, from August to December, the price moved from a Buy Zone to a Sell Zone several times but just for a few days at a time. If you are looking at the charts just once a month to make a decision on your next move, you would have missed lots of trading opportunities to get in and out (trading).

As you can see, we are moving away from investing (not timing the market) to more of a trading strategy, where we are starting to time the market.

This is for those people who have a little more time and really want to get the most out of the price movement within the month.

Buy Zone / Sell Zone Summary

In the first example, the Pound Cost Averaging (PCA), we just got in whenever because it was that time of the month to take a look.

With Value Cost Averaging (last month’s strategy), you buy more as it goes down and less as it goes up. With VCA you will do better in a market that temporarily goes down because you are buying more at the bottom, and you make a hell of a lot when it’s going sideways and up.

Then there’s Buy Zone / Sell Zone. If you only buy near the bottom of the buying zone and sell near the top of the buying zone then you have a situation where you are going to be making a lot more money when the stock goes sideways.

Are you ready to get to the next level?

In the first level and second levels we aren’t timing the market at all. It is pure time in the market.

We dictated when we invested, irrelevant of the stock price.

On the third level we started to let the stock price dictate the time we enter and exit but it still had a time IN the market element to it

In the fourth level, The Buffalo strategy, which we cover in the next instalment, we enter the world of trading and timing the market. The price alone dictates where we enter and exit the trade.

In the meantime if you want to fast track your learning, then find out more about about my investing strategies by downloading my free eBook, The Lunchtime Trader.

Click here to download it now!

To your success,

Marcus