Let’s see if you know who said the following:
I have often said that to buy on a rising market is the most comfortable way of buying stocks. Now, the point is not so much to buy as cheap as possible or to go short at top prices, but to buy or sell at the right time. When I am bearish and I sell a stock, each sale must be at a lower level than the previous sale. When I am buying, the reverse is true. I must buy on a rising scale. I don’t buy long stock on a scale down, I buy on a scale up.
If you are familiar with the trading rules of the Turtle Traders you may guess that the above statement was made by Richard Dennis. However, the statement was made by the legendary trader Jesse Livermore. Both Dennis and Livermore believed in buying into strength and selling into weakness as do I. Since I developed my ETF 2X models, I have never averaged down (i.e. buy additional shares/ETF units as the price decreases thereby lowering the average acquisition cost). Most of us know fellow investors who, if they will admit it, averaged down on the likes of Nortel believing the stock would turn around when in the end it went to zero.
As a market timer and therefore trend follower, I don’t believe for a second that I am smarter than the market. Subsequently, it wouldn’t make sense for me to increase my long positions as the market falls. Subscribers to my QLD/PSQ model can review my latest trades and verify that I made three purchases to get to a fully invested position and each time the purchase price was higher than the previous purchase price since I was buying into strength. Likewise, with my Canada Leveraged model subscribers will note that I made four purchases to get to a fully invested position.
Why not take a 100% position at the outset? The performance results for my ETF models that I present on my blog (here, here and here) are based on that exact premise. After a long signal is generated in the evening, the model takes a 100% position in the underlying at the next market open. For example, the QLD/Cash model below is based on buying QLD at the market open the morning after a long signal is generated and selling the QLD units at the market open the morning after a short signal is generated.
In my actual trading, I have chosen to buy into strength in three or four steps. Let me explain why. Consider the situation in which my timer generates a long signal Monday evening and the market opens Tuesday morning down 1%. Frankly, I’m not comfortable buying into weakness and would therefore wait for the ETF to strengthen before making a purchase.
If you subscribe to the notion of buying into strength you have to determine your own rule to use for your purchases. Will you buy 25% at first and then buy additional 25% stakes as the stock/ETF rises by 0.5% for example? Or would you use a rule based on ATR’s as did the Turtle Traders?
FJP
