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Strategy
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Assumptions:
- Timing is everything. Timing is the key to make money in the stock market. If you Buy and Sell at the right time, you win.
- The bubble takes some time to build until it bursts.
It means its easy to get on the train and make some money. It means it is easy to Buy at the right time in a bubble market. Of course, no strategy can help if you buy just before the bubble bursts.
- When the bubble bursts, 30~40 percentage drop in price will take only a day or 2, may be even worse.
- There is no way you can predict the exact date of the burst. And the drop may take most of your profit and may be some of your investment. I’m sure most of us experience that before. It means the Selling part is harder to maneuver and more important.
The Strategy:
- The strategy is simple:
TAKE PROFIT CONSTANTLY
- We cannot predict when the bubble will burst. We cannot beat the timing factor for the Selling by predicting when the bubble will burst. However, we can beat the timing factor with TIME itself by taking profit constantly.
- This is not a new strategy. And you can find tons of similar strategies with different variations.
Implementation:
- As mentioned above, there are lots of similar strategies. You can do some research on the web or even read a few books if you want to study more.
- Or you can just implement the strategy by the following steps:
- Fix the amount you want to invest, the base amount, say $10,000.
- Fix a percentage of profit to trigger the cash in process, the trigger percentage, say 10%.
- Sell some stocks whenever you have a 10% (the percentage you set in the previous step) profit.
- After the selling, the total amount of investment should be around the same as the one you set in the first step i.e. $10,000.
- Example:
- Buy 100 shares of stock A at $100.
- The initial investment is $10,000 and we let it be the base amount.
- Set the trigger percentage to be 10%.
- Sell stock worth around $1000 whenever the total investment is over $11,000 (10% profit of $10,000).
- We’ll implement the strategy as follow:
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# Shares
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Price
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Total Invest.
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# Shares to Sell
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Cash In
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Total Invest. After Cash In
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1
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100
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$100
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$10,000
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$10,000
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2
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100
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$110
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$11,000
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9
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$990
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$10,010
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3
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91
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$121
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$11,011
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8
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$968
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$10,043
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4
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83
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$133
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$11,039
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7
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$931
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$10,018
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5
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76
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$145
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$11,020
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7
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$1,015
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$10,005
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6
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69
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$160
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$11,040
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6
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$960
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$10,080
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How it Works:
- Let’s use the same example to explain how the strategy works.
- The following table shows the difference between using and without using the strategy.
- When using the strategy, cashing in should happen 5 times when price reaches $160. Total cash-in amount is $4,944. The total investment after cashing in is $10,080.
- If the strategy is using, the investment position should $16,000 when price reaches $160.
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Model without Cash in
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Model follows the Stratgy
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Price
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# Shares
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Total Investment
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# Shares
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Cash In
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Total Investment After Cash In
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1
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$100
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100
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$10,000
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100
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$10,000
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2
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$110
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100
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$11,000
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100
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$990
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$10,010
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3
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$121
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100
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$12,100
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91
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$968
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$10,043
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4
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$133
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100
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$13,300
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83
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$931
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$10,018
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5
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$145
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100
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$14,500
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76
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$1,015
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$10,005
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6
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$160
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100
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$16,000
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69
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$960
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$10,080
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- The following table shows the difference between the 2 models when the bubble bursts and the price drops.
- The strategy actually make less money if you know the bubble is going to bursts and sell all at $160.
- The table shows when the price drops 20%, the strategy outruns the other model.
- And the strategy protect your investment even when the price drop is 50%.
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Model without Cash in
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Model follows the Stratgy
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% Drop in Price
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Initial Invest.
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Total Invest. before Price Drop
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Total Invest. after Price Drop
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Profit/Loss
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Initial Invest.
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Total Invest. after Cash in
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Total Invest. after Price Drop
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Profit from Cashing in
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Profit/Loss
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0
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$10,000
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$16,000
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$16,000
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$6,000
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$10,000
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$10,080
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$10,080
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$4,944
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$5,024
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10
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$10,000
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$16,000
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$14,400
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$4,400
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$10,000
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$10,080
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$9,072
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$4,944
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$4,016
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20
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$10,000
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$16,000
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$12,800
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$2,800
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$10,000
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$10,080
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$8,064
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$4,944
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$3,008
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30
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$10,000
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$16,000
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$11,200
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$1,200
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$10,000
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$10,080
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$7,056
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$4,944
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$2,000
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40
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$10,000
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$16,000
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$9,600
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-$400
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$10,000
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$10,080
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$6,048
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$4,944
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$992
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50
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$10,000
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$16,000
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$8,000
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-$2,000
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$10,000
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$10,080
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$5,040
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$4,944
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-$16
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