Marginal Stock Trader

Thursday, July 16, 2009

Buy Weakness Trading Strategy

MARGINAL STOCK TRADER's post Lessons in Losing Money was the first time the concept of buy weakness was ever mentioned in this website. In that post, we talked about why we sold our Ayala Corporation stock at a loss. One of our stop loss rule was activated on June 30, 2009 when the price of the stock hit 265 pesos. But we also look at this decision as an opportunity to experience this buy weakness strategy.

Trading strategy
Buy Weakness is a "proactive trading strategy in which a trader takes profits by closing out of a short position or buying into a long position," says Investopedia. "Buy weakness strategy is used when the price of the asset being traded is still falling but is expected to reverse and move against the trader."

Profit and loss plan
When viewed in the light of our updated profit and loss plan, we said that we will be satisfied to buy the stock at 237.50 or lower. In the event, however, that the stock moved up contrary to our initial expectation, we shall enter a position at 277.50 pesos.

Entry price
From the day we sold 10 shares of Ayala Corporation stock on June 30, the nearest price to 237.50 pesos is the low of 260 pesos on July 3. After that date, the stock established a support price at 267.50 pesos for the trading period July 7 to July 15 and a resistance at 275 pesos.

Marginal Stock Trader's take is that the stock -- beginning July 6 -- was on consolidation mode for 8 trading days. This ended when the price of the stock broke past the resistance level on July 16, reaching the high of 280 pesos and closing at 277.50 pesos, which incidentally is also our stop loss entry price.

Trading plan
This point highlights the importance of having a definite plan and specific decision criteria. Nevertheless, there still remains an occasion when we come to a crossroad and needed to make a choice between two opposite paths.

What is the probability of the stock price falling to our desired level of 237.50 pesos on or before July 31? Was the breakout at 277.50 pesos closing price means were back to an uptrend now? What about the Marginal Stock Trader rule of maintaining a cash position -- to be used only when entry price is nearest the latest minor bottom -- that leans towards holding back the buy signal triggered by our stop loss rule?

Savings program
Marginal Stock Trader finally decided on July 16 in favor buying 10 shares or 1 board lot of Ayala Corporation stock at 277.50 pesos. Hence, our maintaining cash position shall come fresh trading capital accumulated through a savings program.

Sunday, July 5, 2009

Profit and Loss Plan Review

PROFIT EXIT STRATEGY AND STOP LOSS RULE are among the most important components of Marginal Stock Trader's updated online stock trading plan. Professional traders admit that deciding on a "set of limits that determines the maximum loss or gain an investor will take on a stock", says Investopedia, is basic to stock trading to prevent excessive losses or to lock in profits. This is where our Profit/Loss Plan comes in handy.

Profit target
Our online stock trading plan has this profit exit strategy: simply add 35 pesos to our entry price, and exit the trade as soon as prices move up 35 pesos. We shall tweak this strategy a little bit by creating a more general decision criteria. We shall set the maximum gain we will accept at 12% above the price at which we bought the stock. Our goal is to lock in profits at this point.

Stop loss rule
In this rule, we aim to avoid mounting losses from holding on to a falling stock hoping for a rebound. Here, Marginal Stock Trader lists three options:

First option, based on our updated Online Stock Trading Plan is a fixed peso amount: simply subtract 12.50 pesos from our entry price , and exit the trade as soon as prices move down 12.50 pesos.
Second, percentage of our entry price: we shall set the maximum loss we will tolerate for our position at 5% below our entry price.
Third option, percentage of Minor Bottom. This stop loss rule was briefly described in the article Stop-loss: Add science to the art of using stoploss by Jayesh Patel. As of June 30, 2009, we have identified a Minor Bottom at 250 pesos. We exit the trade as soon as price hits 5% below this level at 237.50 pesos.

Marginal Stock Trader has no prefererence over any one of these three options. But let us look at his latest trade. He decided to exit at 265 pesos his long position in Ayala Corporation -- bought at an average price of 299 pesos -- with expectation of this stock going down further. We will be satisfied to buy the stock at 237.50 or lower.

In the event that the stock moves up, contrary to our initial expectation, we shall buy the stock at 5% above our last selling price preventing additional losses. Hence, we shall purchase the stock if the price moves up 12.50 pesos.

Carrying out the plan
Our plan has a double requirement: we have to sell our stocks (1) if they fall to a certain level and (2) if they rise to a certain level. This plan must be implemented strictly or we expose our trading capital to more risk than what we might want to take.

Related Posts:
Lessons in Losing Money
Accumulating Shares of Ayala Corporation
Long Position in Ayala Corporation

Thursday, July 2, 2009