Big THANKS to regular Reader Jim (that’ll be the prunes, mate) who gave me the idea for this Blog during an email discussion we were having. In essence we were discussing how I go about timing my Buy Trades (please note, this Blog doesn’t really address Sell Trades although at the nub of it they will be partly the opposite in practice), and it struck me that this was a great subject for me to drone on about and that many Readers might find it helpful (especially if insomnia is your particular affliction).
Breaking with my recent lazy tradition of just ripping into my Blogs and hitting the keyboard from a blank sheet of Microsoft Word, I have actually done a Plan for this one and as a consequence you might notice a little more structure. This is exemplified by me having a section that talks about the Principles behind my Buys and then a section that goes into the Practice of actually doing it.
An important element to realise is that you can never get your Buy Timing to be perfect. OK, you might get the odd flukey Trade where you Buy at precisely the best moment, but in practice that will be rare and also mostly driven my luck; do enough Buy Trades and sooner or later you will get a perfect one – a bit like an infinite cohort of Chimps bashing out the complete works of Shakespeare !!
It doesn’t matter though. You must just accept that you cannot get every Buy Trade (or Sell Trade for that matter) dead right on the timing but over a Portfolio, and over a long period of time, you will be roughly right as long as you avoid some stupid things like ‘Buying a Falling Knife’ or that other huge error of not buying something “because it’s already jumped up”; about which I will include a ‘Related Blog’ at the bottom.
So in terms of the psychology around this, you need to just shrug your shoulders and don’t obsess about it when you get a Buy Trade ‘wrong’ – there is no such thing really unless you are doing something stupid. A ‘wrong’ Trade will come good in time as long as you are buying Quality and making sure you don’t buy stuff on crazy Valuations or go daft and buy far too much and be greedy, such that your Position becomes far too over-weight and unbalanced within your Portfolio.
This applies to so many things about the Markets – you have to accept the ‘Noise’ that comes as part and parcel of the psychology surrounding the Markets (both your own psychology and that of others) and learn how to have a more detached and relaxed attitude to your Stocks and to just let time and Quality play out on your side. I have no doubt that experience is a huge help here and the longer you have been at this game the more you can take a relaxed and philosophical demeanor to it all and to not let it bother you too much when something doesn’t go precisely as you would have liked – sadly that will happen a lot !!
Something else to bear in mind when reading this missive is that I am writing this about Buy Trades in the context of being Long-term Investments not for Short-term Trades like for a Day Trader or Position Trader. Much of what I have written will apply to all of these disciplines but not all of it.
Hopefully these will give Readers a good background on the factors behind what I try to do in practice with my Stock Buy timing:
Putting it into Practice
It’s funny because I sort of do this stuff quite naturally and it is only when I seriously think about it that I can identify particular patterns or events that I look for. It is a given with any Buy I am making that the Fundamental picture stacks up and I am happy with the Valuation (those kind of elements are always crucial in my choice of Stock I have decided to put money into – even if it is a top-up to an existing Position or an entirely new Stock I am stalking for a Buy), and really now I am just taking a little bit of time to stalk the Share and then pounce when I think the time is pretty good.
In essence I can identify 4 different types of situation which are as follows and I will write some text about each one below:
For each of these they must also comply with the Principles that I laid out at the start of this Blog.
This is where a Price keeps rising to a particular Price Level (it is best if this is Horizontal Resistance) and then falling back, but it eventually Breaks through the Resistance and charges up. I would buy the next day after a Breakout in most cases (I would like a Candlestick that Confirms the Breakout rather than a Bearish one like a ‘Shooting Star’) but you can also wait for a Pullback to ‘test’ the Breakout where the former Resistance should now act as Support. However, that can work well on Index Trades but for Stocks I often find that they Breakout and run up and don’t Pullback for several days – so if you wait too long you will miss out.
I explain this a lot more in the Blog below (skim through some of the early stuff about Brexit etc. and go down to where the Charts are):
These next Blogs also help with understanding the concept of a Breakout (there is a link at the top to Part 1):
In the case of a Bull Flag (in essence where the Price jumps up quickly to quite an extent, and then goes sideways in a Consolidation move), you follow the same rules and buy when the Price breaks-out to the upside (assuming it does of course because not all Bull Flags will work out although they usually do).
This old Blog has Bull Flags in it with pictures and suchlike:
Coming up off the Bottom of an Uptrend Channel
Hopefully my diagram below sort of explains this. First off you need to identify the Uptrend Channel which is actually really easy once you have more experience, and if you have access to some sort of Charting/Technical Analysis tool that will enable you to draw Trendlines, then it is good practice to do this.
As another guide, if a Stock is in a sustained Uptrend Channel then you will normally find the 200 Day Moving Average Line is rising as well. It is important to realise that whilst the Price is doing the Pullback or Retracement leg, it is really a potential ‘Falling Knife’ and if you buy on this down leg, then you run the Risk that the Price breaks below the Bottom Uptrend Channel Line and you will have a big problem on your hands. It is much better and safer to wait for the Turn up off the Bottom Uptrend Channel Line and then to Buy the Stock.
Ideally, you would combine your Buy timing off the Bottom Line with careful use of Candlesticks and some other simple Technical Indicators like the RSI turning up etc., but that is less important than the simple principle that you wait for the Turn and then buy.
This Blog talks about coming up off the Bottom of an Uptrend Channel in the context of Index Trades, and also talks about Breakouts and stuff (the numbering is a bit weird but there are links to the other parts at the bottom of this one):
I think in practice I would apply the principles and also the 2 practical timing methods of Breakouts and ‘Coming up off the Bottom’ even for Income Portfolio Buys, but I can perhaps envisage occasional situations where I would buy a Stock because the Dividend Yield % had risen to a very attractive level and I would ‘Bottom Fish’ to lock in this Yield for many years into the future. However, I cannot see this happening very often because ‘Picking Bottoms’ has often turned out to be just another false bottom and the Stock falls again. I would far rather buy something where the movement is upwards.
‘Foot in the Door’
Again this would probably be quite a rare thing but I have done it in the past. There are situations where I am extremely keen on a Stock but I don’t actually have enough spare Cash or perhaps I might not have a ‘Slot’ in my Portfolio (the concept is that my WD40 has 40 Shares within it and I cannot buy another until something has either dropped out or been kicked out).
In such circumstances I have often found that I get distracted and forget about the Stock I was deeply head over heels in love with, and some other Siren sings her little ditty to me and I change my affections for her fishy tail !! By buying a very small Position, for example just 0.5% of my Portfolio value, I have got my ‘Foot in the Door’ and then I am concentrating on the Stock and watching it because it becomes part of my Portfolio on my ADVFN App on my Fone and also I will put it with my Portfolio on SharePad etc. Then, once I have some Cash and a Slot, I can buy more of the ‘Foot in the Door’ Stock.
If you like it is a Placeholder that means I don’t lose interest in it. Just recently, I was extremely keen on Lok ‘n Store LOK and I was very close to buying it but I didn’t. Of course, it then jumped up by probably 60% or more in a very short period of time and I was extremely gutted I had not moved when I was so eager to buy it. If I had bought a Placeholder I would have been on it and I might have bought more when I saw it was on the move.
OK, I think that covers it. Make sure you look at the Blogs I have highlighted with Links and the ‘Related Blogs’ below should help as well.
I wrote this Blog utterly years ago but it is still bang on the message !!
These next Blogs are all about how I do Valuation of a Company/Stock – there are links at the bottom to the 3 earlier bits:
These 2 blogs are about how I do Position Sizing:
Better to be on the Train – “I can’t buy that it has risen too far already”:
I wrote these Blogs about how I manage my Income Portfolio and you might find them a good read. This is to Part 7 but there are links at the top to each of the other Parts:
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