Strategy 4 of 5: Buffalo Strategy

Move over Bulls and Bears…here comes the Buffalo Strategy – up to 35% a year on your investments in just 10-20 minutes a day (but that means every day!).

In the Buy – Sell Zone strategy discussed in the last blog, we bought and sold stocks as the price moved from 1 Zone to the next. In other words, we started to time the market but still did it in a manageable way i.e. by looking only on a weekly basis or a monthly basis.

Now let us look at timing the market fully. We do this through the Buffalo Strategy, our name for sideways moving markets. With the Buffalo Strategy, we only buy if the price comes close to the bottom of our range (Zone 1) often called Floor or Support), and we sell when the price nears the top of our range (Zone 4) often called Ceiling or Resistance.

Buffalo Strategy Example
Where does the term ‘Buffalo’ actually come from? You probably know that a rising market is called a Bull market, and a falling market is called a Bear market. However, there is a 3rd market movement, the sideways market, which up until a few years ago did not have a name.

So I published an article in a national newspaper to announce the arrival of the sideways moving ‘Buffalo’ market. The idea was to come up with another big animal starting with the letter B, which had something to do with a sideways range. I thought of the open ranges in America and that’s how the Buffalo Strategy got its name.

The sideways Buffalo strategy can be used in all three time frames:

  • Short term – daily / weekly trades if you have 10 minutes a day
  • Medium term – weekly / monthly trades if you have 10 minutes a week
  • Long term – monthly / yearly trades if you only have 10 minutes a month

My rules for the Buffalo Strategy are:

  1. Three bounces from either a support line, or a resistance line
  2. The ratio of the profit to risk on each trade must be at least 3 to 1. That means for every £10 you risk you are potentially gaining £30
  3. The percentage price difference between the support and resistance lines must be at least 10%; for a medium time frame 20%; for a long time frame 30%
  4. The Trading Volume must be more than 200,000 a day
  5. The Price must be above $10
  6. Always invest with the trend

Ok that might have been a bit jargon but we explain more at our 1 day event (see link below).

So where do you find these sideways Buffalo Strategy stocks? For our clients, we do all the work, offering a weekly list of stocks which are doing this sideways movement.
Buffalo Strategy Example
Let’s look at the example above. Most people buy something (here at $43) in the hope that it will eventually go up in price. After one year they look at the stock and, as in the example below it has actually fallen in price ($41). So after one year, a loss of 5%. But when we look more closely at the chart, we can see what other people haven’t bothered to look at.

The stock was moving all year around, if only we had been looking. As soon as we see that the stock has a support or floor, it is time to get in. 3 bounces is enough to see a floor. The idea is to try to get in at the lowest possible point i.e. 36 and sell at the highest possible point i.e. 44. Will we always get in and out at the right price? No way. But we sure are going to try. The results are spectacular – instead of losing money we are actually making – a lot – of money.

Please note that since we are now trading (TimING the market) and not investing (Time IN) the market, we have to start using a Stop Loss for every trade to ensure we keep our losses to a minimum. A Stop Loss is an electronic order that gets us out at a predetermined price. A Stop Loss forms part of one of the most important and sadly ignored parts of trading, namely Risk Management. Needless to say, we will be covering that in future blogs.

The great thing about trading is that unlike investing, we don’t just make money when markets go up. With trading we also make money when markets go down. This means that we can actually make money when markets go up AND down. Let us take a look at the same stock, below.
Buffalo Strategy Example
Now, instead of buying low and selling high, we also sell short high and buy back low. And we can keep doing this for as long as the stock goes sideways. It is surprising how many people totally ignore this way of making money. I think it is because they don’t really understand it and don’t know how it works. Again, needless to say, we will explain the art of selling short in more detail in a future blogs or you can get a free copy of my book my clicking the link below.

Can you see how powerful this is IF we spend 10 minutes a day looking at charts instead of 10 minutes a year?

For your copy of my book The Lunchtime Trader please here here!