8.5% in 2 months

[neenunnoon]

Just looking for opinions on the strategy that I have been trading.

Now, its not real trading per say, and I am doing what everyone tells you not to do, average down.

I am doing this on two stocks that I believe in and want to hold long term, so when the stock is falling it does not phase me.

One stock is between $2-$3 and the other between $3.50-$4.50

I have buy orders at $0.10 intervals all the way down for 1000 to 1500 shares each. As soon as the buy order is filled, I then enter in a sell order $0.10 away. So each time a sell order is triggered, I bank $100 or $150 minus commish. Most days a few sell orders are triggered, as stocks move sideways most of the time.

With a total trading capital of $70K, have made $6500 in 2 months. I am not concerned with the overall value of the account, only what income is generated.

The risks I see doing this are:

-The stock goes to zero and all capital is lost
-The stock increases in value and more capital is needed to generate same return
-The stocks volatility decreases

Thanks

 

[tommcginnis]

• This is a niche play and needs to be carefully monitored.
• It can be a crap-ton-load of fun.
• If you don't have rigid, immutable risk control, it *will* lead to ruin.

Your post seems to recognize these things, so.... as long as you're having fun, and you recognize that it might end next week {and you're shopping for new targets: UGH! <$5?!? }
AND YOU HAVE A RISK MANAGEMENT RULE IN PLACE (besides BTFD).....
Have fun!

 

[bpr]

The risks I see doing this are:

-The stock goes to zero and all capital is lost


Thanks

u know the risk still u still u do it

even if it does not go to zero but say 3$ stock goes down 1$ stays there for a year or 2

u r sitting on big drawdown blocking most of your money without generating any profit

thought abt that??

 

[neenunnoon]

Ummm, even if the stock goes down to $1, I would keep generating the trades, so will still be making income from it. As I said, I will own these for long term, and not concerned with overall value of account, just as long as they keep moving one way, then the next.

The stocks have solid track records, good management, so I see the risk of them going to $0 low, especially both of them at the same time.

 

[imjohn]

I have buy orders at $0.10 intervals all the way down for 1000 to 1500 shares each. As soon as the buy order is filled, I then enter in a sell order $0.10 away. So each time a sell order is triggered, I bank $100 or $150 minus commish. Most days a few sell orders are triggered, as stocks move sideways most of the time.

With a total trading capital of $70K, have made $6500 in 2 months.

Trading your strategy without deviation, if one of your stocks drops a $1.00 in a slow, steady fashion (with no +.10 moves along the way), your plan would dictate that you'd accumulate 10,000 shares (10 blocks of 1,000) on the way down.

At that point, you’d be down -$4500 (plus whatever commissions you’ve spent).. and holding 10,000 shares.

Block 1. -900
Block 2. -800
Block 3. -700
Block 4. -600
Block 5. -500
Block 6. -400
Block 7. -300
Block 8. -200
Block 9. -100
Block 10. 0

If it was blocks of 1500, you’d be down -$6750 and holding 15,000 shares.

Psychologically, that hypothetical moment would “phase” me. (Personal comfort level, a very individual thing).

For the effort of day trading (you mentioned few trades/day), 4.25% a month (with a chance of being back to square one if you execute your long-only strategy without deviation through a steady down move) does not seem worthwhile.

Just providing the solicited opinion. I actually tried a scenario like the one you described in my journey to learn day trading, but it ended poorly for me. YMMV.

 

[neenunnoon]

Hi,

Thanks for your opinion. Yes, its not for everyone. But whats the difference if I bought $70K worth of stock at $4 and it slides to $1, or if I averaged down and making some income on the way? Even at the lows, I would continue to make the trades, so its not like dead money sitting there underwater like a buy and hold investor. I have been holding 15000 worth of shares, and down more than $6750, it does not bother me, just as long as there is continued movement, which, so far, there continues be. And that 4.25% a month is 51% per year. I would be happy with those returns. Dividend holders sure dont make that.

 

[imjohn]

Hi,

whats the difference if I bought $70K worth of stock at $4 and it slides to $1, or if I averaged down and making some income on the way?

To me, the biggest difference is one of effort. If I bought once and a year later ended up break-even or down a bit, I could stomach it. But if I was flawlessly executing my day trade strategy (few trades / day, 250 trading days / year) and ended up in that situation, I’d be demoralized. There is also the matter of commissions and short-term capital gains tax treatment (US residents).

I'm not sure it's true averaging down, because you have a +$.10 exit target for each entry (just no downside exit stop defined).

That said, it seems like you have some experience with what you’re doing, and confidence in it. I wasn't able to get that “strategy” to work for me, but that’s not to say, it doesn’t work.

 

[drm7]

This is called "scale trading," and there is a small cottage industry of commodities traders that do this strategy on commodities that are trading below their cost of production. It works "in theory," but you can still get blown out if you run out of money before the stock/commodity turns up.

 

[zdreg]

This is called "scale trading," and there is a small cottage industry of commodities traders that do this strategy on commodities that are trading below their cost of production. It works "in theory," but you can still get blown out if you run out of money before the stock/commodity turns up.

Old saying on Wall Street: " Markets can stay irrational a lot longer than you can stay solvent."

 

[BlueWaterSailor]

Trading your strategy without deviation, if one of your stocks drops a $1.00 in a slow, steady fashion (with no +.10 moves along the way), your plan would dictate that you'd accumulate 10,000 shares (10 blocks of 1,000) on the way down.

At that point, you’d be down -$4500 (plus whatever commissions you’ve spent).. and holding 10,000 shares.

No dog in this fight one way or another - but can you point out even a single stock that's done that? I.e., lost 50% of its value "in a slow steady fashion" without reverses? People often bring up contrived scenarios which "could" theoretically screw up a proposed strategy, but... I just don't see these as meaningful arguments unless they have at least some basis in reality.