In the last post, we discussed the fact that we always go with the trend until the ‘bend at the end’ i.e. we go with the trend until it has changed direction and started a new trend – at that point it was safe to hop on again. This month we explore another way of timing the market, using Moving Averages (MA) combined with Position Trading. We then discuss the pros and cons of each.
In essence, MAs serve to tell us where the trend is over a certain time period, using the average closing price over that particular time-frame. Position Trading is where we enter the trade not once but several times, hoping to build a larger position at a better price over time. One of our earlier strategies, Value Cost Average (VCA), where we enter with differing amounts every month without fail, is an example of this. If you missed this strategy then you can grab your copy immediately by leaving your details at: www.investment-mastery.com/wealthwatch.
Imagine you have been waiting to buy a stock for some time, but the price keeps going up and you don’t want to buy in at too high a price. Suddenly the stock price starts turning in the other direction. Patiently you wait for an entry point. This is what happened to Apple (AAPL) below. Remember that when we are looking to take up our first position, we want to see a minimum of – 20% drop in the price from the high. This ensures that we never enter at a high point.
Unlike VCA, where we would enter immediately after the – 20% drop in price and add to our position every month whether the price goes up or down, with the MA strategy we wait for the price to first turn in our direction before entering. We do this by using the MA lines. We wait until the stock prices breaks above the blue MA line and retraces, forming a new high or ‘Peak’.
Step 1: Wait until the stock breaks above the peak
Step 2: The stock retraces, causing what is called a ‘Peak’. The new Peak is now our entry point. We never enter immediately it breaks the Peak, but add some ‘fluff’ of 1% to ensure it really is going in our direction.
Step 3: If the stock rises above the new Peak price we enter, as this shows momentum in the right direction, signalling a possible new trend. If it doesn’t rise above the Peak we do NOT enter
This is an example of going ‘long’ i.e. buying. It would be the inverse if we were looking to sell short.
Let us take a look to see what happened to Apple below:
AAPL reached a high of $705 before it started turning down. We waited for a -20% drop before entering, to ensure we don’t get in near a high. It went below the required $564 in November. With VCA we would have entered at $564 and then entered every month, irrespective of the price. With the MA strategy we wait for the price to rise above the MA line, which it does in November.
It hits $590 before retracing down, tries to come back up to break through with momentum. It does break through but there is not enough momentum to get the price above the 1% fluff we have added to the peak price to tempt us to go in. In both January and February the price goes above the blue MA line again but doesn’t form a peak to break through so we wait. In March it breaks and goes to $461, retraces and then breaks through. We enter at $465. This is our first position.
Believe it or not, we are actually hoping it will continue down a bit more to allows us to add to our position, hence the name, Position Trading. By doing this, it allows us a better average price before the big move occurs.
At the beginning of May it goes above the blue MA line, retraces and allows us to get in at around $445, giving us our second position. In July it does it a third time, allowing us to get in around $423, giving us a third position before rising to a high of $524.
Can you see that each time we get in we are bringing down the average price? To further accentuate this and to ensure we profit from this extremely simple strategy, we add 20% more money to the position every time we get in, as long as the price has fallen. This allows us to get in at a better price AND purchase more at a better price. While it is tempting to add more than 20% or even double up, it is not advisable to do so. We don’t want to blow all our money in one stock, so adding 20% more to each position is adequate.
We are nicely in profit at time of writing. By the time you read this article, Apple will have had its earnings report so you will be able to see what happened to the stock for yourself. You will be able to see for yourselves just how powerful the strategy is or you can laugh at us (although even if it does come back down, this will just allow us to buy some more at a cheaper price).
Why not take a look to see what happened? Just go to www.freestockcharts.com and look up AAPL.
1. Bend at the end (see last article): not easy to find exactly until it has happened; but gives more certainty as it avoids getting in too early
2. Position Trading with MA (this Wealth Watch article): very simple to find and if it is really turning at that point then you are getting in nice and early; but the other side of the coin is that it can get you into the first position too early and the stock continues to fall, causing your average price to remain high, so you need to wait longer for profit
In these times it is a MUST for you to learn more about what trading and investing in stocks, commodities and precious metals has to offer. We are having a series of 1 day events where we go through the strategies so you can take control of your own finances.
But first, why not go ahead and download your FREE STRATEGY REPORT, exclusive for our subscribers:
Until next time,