Ok, so I get this question a lot: what if I want to own a stock long term - does what you do work for stocks instead of just options. The answer is YES! But you will have to learn to "long term trade" the stock you wish to own. Let's look at how that works.
Traditionally, when you buy a stock for the long term, you buy it and put it away. If you are more active, you will read the news, watch the earnings etc. I don't like all that work and I and I think that generally, when it comes to options, its a waste of time since the future is so hard to predict and the macro future is even harder to predict. However, I do see the wisdom in holding stocks long term. I do NOT see the wisdom in buying something and then just putting it away without ever managing it. Thats why if I were to buy something for the long term, I would long term trade it not hold it.
Pull up any chart of any stock and what you will see are peaks and valleys regarding price. Now, just holding the stock long term will produce positive returns if the company continues to perform. However, that means you will have to monitor its fundamentals and extrapolate whether or not you believe their fundamental performance will support the stock price. But there is another way that is less work.
Long Term Trading a Stock
Step 1: Decide how much of your portfolio you want to allocate to the stock. Traditionally, I usually set 10% of my portfolio to a long term trade stock. Let's assume you have $20k to invest total - the amount would be $2k to any stock. Let's use XYZ stock at $100 per share as our entry.
Step 2: Decide what PERCENT STOP you will use. We never enter a trade without a stop because doing so triggers "Hopium" which is an awful way to trade. 10% down is what I would use but ITS NOT A SELL STOP. The sell stop I would use is 30% FROM COST AVERAGE.
Step 3: Review the chart. We are looking for timing on the initial purchase. Use the daily chart. If it is in a downtrend, then WAIT. Do not buy because you "think" its going up. That's not a thesis.
Step 4: Once price has hit an area you have decided to go long at, BUY 50% of your total allocation. If you want to own XYZ, and the chart is in an area of support, buy $1k of it. You are long 10 shares of XYZ at $100 per share.
Step 5: Now, here's where the work comes in. On your chart, put in an alert for -10%, . IF price hits that level, you immediately go to the daily chart and monitor when it shows a reversal back into your direction, you add the other 50% of your total allocation. Now you are $2k in our example. You bought another 11 shares of XYZ at $90 her share. So your cost average is $95.
So now you are at your max allocation. If price continues to go down another 10%, or 20% from original entry, you EXIT THE TRADE. We do not "hope" around here.
Let's say you are correct and the stock starts to move back up again. ONCE PRICE HITS +20% OF YOUR ORIGINAL ENTRY PRICE, you sell half. So, you would be selling 50% of your XYX at $120 for a $25 gain, or 25%.
Now, two scenarios can happen, price will go up or down. Let's say price goes up. You still own $1k of XYZ. Let's say price goes up another 20% - then you sell half of what you still have or 25% of XYZ. That's leaves you with 25% invested of your original allocation.
Step 7: If price reverses again to the downside, then you would buy 7.5% at 10% down and another 7.5% at 20% down. Its easy to track if you just set trade alerts for each % level. You are paying a higher price than the original, but not by much - 5% actually. But more importantly, each time you are triggerred to buy more, you can check the news or the fundamentals and see if your orignal buy thesis is still valid. No hopium,
And then, you repeat over and over again.
The object is threefold:
You are forced to stay involved and informed about the stock.
You are taking advantage of dips and advances in the stock price.
You are maintaining a 10% of total allocation so you will never be overweighted.
Let's look at a hypothetical with numbers for a 20k portfolio:
Buy 100 shares of XYZ at $10 or $1000
Price goes down 10% - you buy another 110 shares at $9. Now your cost average is $9.48 for a total of $1991.
Stock goes down another 10% to $8.10 and you get stopped out for a loss of $290.
You revisit and revise your thesis because clearly it was wrong.
Here's an example what happens when price goes up:
Buy 100 shares of XYZ at $10 or $1000
Price goes up 20%. You sell half or 50 shares at $12 which leaves you with $600 in XYZ.
Price goes down 10% so you buy 37% of original allocation, or $750 at $10.8 or 70 shares. You now own 120 shares at $10.47.
Price goes down another 10% and you buy another 37% of original allocation at $9.72 or $750/9.72 = 77 shares. You now own 197 shares at $10.15.
Repeat over an over again. In this way, you can keep "buying the dips and selling the rips." It's an excellent way to "long term trade" a stock while taking advantage of price swings.
You still have a hard stop but its based on your cost average.
You are locking in profits as it goes up.
You are averaging your cost when it goes down.
You get to reevaluate every time price hits a stop level or a profit target.
Its a little more work.
One final note: every time a buy or sell level is hit, you are still using the chart to time the entry.
So there you have it: a twofer: how to use my charting methods to buy stocks and how to buy stocks for the long term.