The prevailing mentality among individual investors is they want to “buy low and sell high”. The prevailing mentality is wrong. And has been for more than a century.
Three weeks ago, we discussed that many investors are afraid to invest in the markets when they’re trading at all-time highs. They’re afraid to make a mistake and decide to wait until they can get a better price. After all, aren’t we supposed to buy low and sell high? That’s the mantra that we hear all the time.
It’s time to change your thinking. Trying to buy a stock that’s moving lower and catching it just as it’s about to turn around is impossible. Of the millions of traders in the markets all around the world, one person catches it at the absolute low. And that’s just a lucky guess.
That was known more than 100 years ago as well, as colorfully illustrated in the book, Reminiscences of a Stock Operator by Edwin Lefevre. The main character, Larry Livingston, is a thinly-veiled reference to Jesse Livermore.
Livermore, the acknowledged best stock market trader of his day, says “One of the most helpful things that anyone can learn is to give up trying to catch the last eighth – or the first.
These two are the most expensive eighths in the world. They have cost stock traders, in the aggregate, enough millions of dollars to build a concrete highway across the continent.”
The best trader of his day operated in the same way that TradeStops operates today.
The TradeStops Stock State Indicator (SSI) Entry signal is a very conservative signal. It requires a stock to have made a bounce off the bottom of at least one Volatility Quotient (VQ) percentage and the stock’s trend must be strongly positive.
Here’s an example…
Bristol-Myers Squibb (BMY) entered the SSI Red Zone more than a year ago. It dropped and hit a bottom of about $46 in late January 2017. The stock has a VQ of 17.5%. At its current price of just under $63, BMY has bounced off the low by more than 1 VQ.
But the SSI Trend Line, the blue dotted line, has just started to turn higher. It might be another couple of weeks before it’s strong enough to finally trigger a new SSI Entry signal for BMY.
It’s important for both elements to be bullish.
There are many instances of what happens when people try to jump the gun and just use one element. We printed this chart in February 2016.
Four times the iShares ETF for physical gold (GLD) gave us head fake moves to the upside. GLD had bounced more than 1 VQ off the bottom, but the SSI Trend Line did not confirm the move to the upside.
And each time GLD slid further before finally having both elements trigger.
In an article from November 2016, TradeSmith showed that a strategy of doubling up as a stock moves higher makes much more sense than doubling down on a losing stock.
Looking at the chart for Constellation Brands (STZ), each time that a person would have bought, it would have been at an all-time high!
But the stock kept moving higher.
And the stock continues to make new highs, closing above $202 yesterday.
Jesse Livermore’s strategy was to continue to buy shares of stock as the stock climbed higher. One hundred years later, that’s the TradeStops way as well.
Buy high, sell higher.
Education Director, TradeStops