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Hi All:
At the risk of being hounded by any reasonable member on the list, let's
take a hypothetical situation here.
If you've read most of my posts, you know where I come from...
1. I like to go long, and my basic assumption is that the long-term bull
market has not ended yet.
2. I like to invest in the leaps of sound, well-established companies -
leaders in their sectors.
3. I maintain that I'm a poor chart reader, and my initial long entries are
usually not particularly
that great.
4. I like to average down.
5. I don't have stop losses.
6. Initially, I would like to divide the total amount I want to invest in
that particular leaps into
equal parcels for initial buy and subsequent avearging down buys.
Just hypothetically, let's select MOT for trading (the stock this time).
MOT is fundamentally a sound company, long-term basis. So it's a good
candidate for buying (cf my excel file on the 55 stocks).
MOT closed at around $36 on Jul 12. If you look at the
intermediate-long-term monthly chart of MOT (see attached), there's very
good support around the $12 1/2 area.
If you've done your technical analysis and decide you'll be interested in
buying MOT very long term, here are 2 ways of doing it. (Let's say you
intend to spend no more than $30,000, and intend to average down if the
previous purchase price has dropped 30%.)
A. Just one large purchase:
833 shares @ 36.000 total $ 30,000
B. Buy eqaual $ amounts (if prices can go that low):
1st purchase: 208 shares @ $36.000 total $ 7,500
2nd purchase: 298 shares @ $25.200 total $ 7,500
3rd purchase: 425 shares @ $17.640 total $ 7,500
4th purchase: 607 shares @ $12.348 total $ 7,500
---- ------
1539 (average price $19.500) 30,000
C. Averaging down with martingale system (see note):
1st purchase: 56 shares @ 36.000 total $ 2,000
2nd purchase: 159 shares @ 25.200 total $ 4,000
3rd purchase: 454 shares @ 17.640 total $ 8,000
4th purchase: 1296 shares @ 12.348 total $ 16,000
---- ------
1964 (average price $15.000) 30,000
Note: For an understanding of the martingale system, please visit:
http://www.gamblingbets.com/tips/martingale.shtml
At least C looks very interesting, on paper.
Is it workable? Would one make money? My favorite sentence: "Hindsight
will tell."
Possible shoot-downs:
1. Bull market will end sooner or later, possibly sooner.
2. Extremely large drawdown.
3. Unrealistic - the stock may never go as low as $ 12 1/2.
4. Unrealistic - the stock may go to $5, or even $1.
5. ....
6. ....
Yes, all these criticisms may be true, but...
Remember my posts on my buying the MSFT leaps? I didn't use "equal amount"
parcels. Rather, the dollar amount (in general) increased substantially at
later purchases, though not exactly at the 2x factor.
OK. I'm ready to be thrown to the wolves...
Regards,
Wong
ps: This is my trading style, which suits me fine. I won't suggest doing
the same for any other person.
Attachment Converted: "f:\eudora\attach\mot monthly.gif"
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