It was a rough ride the couple of days at the markets, Oil fell to $83 and US jobs report was dismal, but everyday is a new day, with the valuations of shares being very cheap, and no screaming headlines in Eurozone, the Asian markets including ASX staged a comeback today with oversold stocks tempting buyers back to the market.
I get asked about what’s a good price to “buy”.
Now, I have over the years, been observing price action, according to market type, on certain stocks, (which is also why I say to people, instead of holding a number of stocks, focus on a few stocks that you understand, have an idea of how and why it moves and your trading profits / performance will be much better). And I have noted a few ways in which to identify price points for buying or selling.
I was in a Van Tharp Institute workshop where observing price points through ‘standard deviation” was explained by one of their teachers, Ken Long (who should really be addressed as Lt.Col.Ken Long, Ph.D. but he’s so cool he doesn’t mind formalities), it was such an elegant explanation that I could not do it here (hehehe) but I thought I’d let you know (for those mathematically inclined) that it’s one of the ways.
And as you may know, (for those who read the juicy bits of my book) ,I am not so mathematically inclined, what I do is look at the charts and identify the Support and Resistance. Those are the price points I look at first. (These are basic Technical Analysis terms – Google for definitions).
However, that’s not the only thing, a chart is just one of the references to answer the question
what price to buy”.
I buy (or open a trade if Selling first is your strategy – especially for Options traders), following a list of considerations that I have structured and discussed in my book. (Check it out here).
The ones that are very useful for me in this kind of market are :
- Price – Trend
- Investor sentiment
- Volume
- Technical Pattern
- Value
Note that many other items comprise my checklist for consideration of a trading decision.
But back to the million dollar question, “When to buy?” My answer there is when it is worth the risk. The Risk-Reward question is always the paramount question. How do you assess the Risk-Reward? I am probably repeating myself, but I share this in my book which you may want to know more about here.
One important point is : you identify or nominate the risk you can take.
For me, I like low-risk high-reward, such that I like to go over a structured and comprehensive checklist that incorporates my system. I also like to take trades where I can make 300 percent of what I risk or a 3R trade (as per Dr. Van Tharp’s concept of R-Multiple).
A trade I closed today was for a Covered Call strategy on Santos (STO) – I sold STOTO7 at 68cents few weeks ago, yesterday STO ended at 11.22 a price level that I haven’t seen in 8 months (yes, I was drooling) and the value of the option was at 15cents. 15cents was a very tempting price to close on, believe me, I was wanting to take the profit. But, here’s the thing, we don’t know if the slide will stop there. (Do you? I don’t!)
I have a few theories that it could bounce, but, I don’t want to be “wiser than the market” so, as per procedure, I took my time (cooked dinner, played with the kids, read something fun overnight) and waited for confirmation of desired move up – telling me that the move down is over (for now), and it’s time to close the trade and take the profit.
I bought STOTO7 to close today at 22cents share.
Having sold it for 68cents, I made 46cents profit.
With an Initial Risk (or 1R) or 10cents (that I just assign to all my covered call positions), I made a 460% gain or 4.6R profit (excluding fees). I’ll post the liquidation advice tomorrow so check back here.
Trade with caution and may the Fierce be with you!
STOTO7 Closing
