As of 05/20/2022
Indus: 31,262 +8.77 +0.0%
Trans: 13,491 +51.76 +0.4%
Utils: 991 +1.46 +0.1%
Nasdaq: 11,355 -33.88 -0.3%
S&P 500: 3,901 +0.57 +0.0%
|
YTD
-14.0%
-18.1%
+1.0%
-27.4%
-18.1%
|
|
As of 05/20/2022
Indus: 31,262 +8.77 +0.0%
Trans: 13,491 +51.76 +0.4%
Utils: 991 +1.46 +0.1%
Nasdaq: 11,355 -33.88 -0.3%
S&P 500: 3,901 +0.57 +0.0%
|
YTD
-14.0%
-18.1%
+1.0%
-27.4%
-18.1%
| |
| ||
Here is a money management technique called zero cost averaging, and it is based on an article from the April 1998 issue of Stocks & Commodities magazine by Terrence Quinn and Kristin Quinn. It has nothing to do with moving averages or non-moving averages, or dynamic moving averages, or weighted...well, you get the picture.
The idea behind zero cost averaging is to sell enough shares for a profit to equal the cost of those shares without selling them all. An example makes this clear.
Suppose you buy 1,000 shares at $6 each, for a cost of $6,000. If the stock rises to $10, you want to sell enough shares to get back your original cost and hold the remaining shares essentially for free.
You can hold them forever and not lose any money on the transaction, even if the stock were to go bankrupt (of course, the government doesn't see it that way. When you finally do sell those shares, they IRS will want to take their share. Think of it as your contribution to fund huge bonuses for CEOs when the government loans them your money).
The flaw in this strategy is that it requires price to move up in order to sell shares at a profit to get your money back.
What if we create rules that say,
The following table shows a sample trade when the price bobs up and down between $9 and $12.
Item | Price | Shares Held | Trade | Cumulative Cost |
1. | $12 | 0 | Buy 600 | -$7,200 |
2. | $9 | 600 | Buy 300 | -$9,900 |
3. | $12 | 900 | Sell (450) = 500 | -$3,900 |
4. | $9 | 400 | Buy 200 | -$5,700 |
5. | $12 | 600 | Sell 300 | -$2,100 |
6. | $9 | 300 | Buy (150) = 200 | -$3,900 |
7. | $12 | 500 | Sell 400 (zero cost) | +$900 |
8. | 100 | +$900 |
I chose 33% on the buy side instead of 25% to get the numbers to work out evenly. You can chose any numbers you want for the buy and sell sides.
If price were to drop from $9 by 25% to $6.75, you would buy 50% more shares following the rules outlined. If it climbed from $12 to $16 (33% more than $15), you would sell 50% of your holdings, rounded up to the nearest 100 shares (or rounded down if selling would leave you less than 100 shares). At each step, check to see if selling all but 100 shares would leave you with at least 100 shares and a profit. If so, then sell those shares and stop trading this stock.
If you zero cost average like this, you can build a diversified portfolio of many stocks held at zero cost. If any of the stocks were to go to $0, you would not lose any money. Again, all of the numbers are flexible here. You can buy and sell at 10%, 20%, or 50% increments (or whatever). You can look for 1,000 shares at zero cost instead of 100. You can use dollar values instead of percentages, like buy or sell if the stock price changes by $3 and only trade 200 shares at a time.
-- Thomas Bulkowski
Begin your journey to becoming a better trader or investor by buying a copy of my book,
Trading Basics,
picture on the left. It's full of tips and ideas. It's the first book in the "Evolution of a Trader" trilogy.
If you click on this link and then buy the book (or anything) at Amazon.com, the referral will help support this site. Thanks. -- Tom Bulkowski
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