Share Trading Strategy

brainactive on 14/01/2017 - 21:55
Last edited 14/01/2017 - 22:18

Thinking about starting investing in shares. My strategy at the moment is to buy shares immediately after big events that result in big drop in share price. There tends to be over reaction to these big events and shares almost always bounce back in the following months. An example is the dreamworld incident at the end of October when prices dropped to 2.00. Two months later, it is now selling at around 2.25. This is around a 12% increase over the span of 2 months, and taking into account brokerage, probably 10% return in 2 months. Anyone else have any success using this strategy?

Any recommendations on what is the best platform to trade in? Is commsec any good? Any good deals (e.g. free brokerage) at the moment?

Financial

Comments

  • Shazam82 on 15/01/2017 - 13:44
    +6

    My best advice is keep it simple. If you think you can outsmart the market you're kidding yourself and someone else would have done it years ago. Instead of trying to pick dips, if you buy stocks gradually over a period of time it smooths out the volitility. Invest in quality stocks in different industries. Vanguard ETFs are also a good option for diversification with small amount of capital. Keep your stocks long term and don't panic sell.

  • Baysew on 15/01/2017 - 14:07
    +1

    I wonder if anyone put the house on Dick Smith?

    • mskeggs on 15/01/2017 - 22:28
      +4

      Well, Dick did, some years ago, and it worked out great for him.

  • Bunnyburger on 15/01/2017 - 14:51

    You can't beat the market in the long run. Time in the market vs timing the market

  • [Deactivated] on 15/01/2017 - 15:01
    +3

    Bloke i work with borrowed 100k from the bank and invested heavily in the gfc, never have i seen such a profit in shares in my life.

    He has now almost 2 mill in various shares and after tax his dividend is something like 80k per finiancial year for the past 5 years and seems to have settle sometimes gains abit and in others they drop.

    Lucky sob is you ask me.

    • Skramit on 15/01/2017 - 15:40
      -1

      "Buy the dips" is a mantra many successful traders live by.

      Buy when everyone else is selling or has sold. It takes balls and knowledge of course, but it's not rocket science.

      • mskeggs on 15/01/2017 - 22:42
        +3

        I was chatting to my father in law at the depths of the GFC. Lots of stocks down 50%.
        There was a real risk that lack of debt liquidity would burn some companies that were otherwise ok.
        A tiny bit more panic and I think it would have happened, if central banks had been a little slower turning on the taps.
        In 1929, if you bought at 50% off, you would have lost 80% of your capital as the market continued falling to 90% off the high.
        You could have bought Lehmans or Bear Sterns or a bunch or other leveraged companies with disastrous results.
        We concluded it was probably ok to buy in such a downturn. Either it comes good and you make plenty, or it goes bad and you are selling second hand shoes at the car boot sale anyway because the economy has cratered and unemployment is at 30%.

        I was lucky, I was pretty broke anyway, so had little to lose, but little to buy with either.

        A bit like property investment now. You can squeak by on current rents and interest, but if something goes a little wrong, rents fall 10%, rates go up 2%, and you suddenly owe the bank $200k more than you can sell the property for, and you are losing hundreds a month to cover the mortgage. Not that property does anything but go up in Oz.

        • Skramit on 16/01/2017 - 08:58

          When the ASX hit ~4000 in 2009 I was asking about buying but my broker said to hold off because they weren't happy with the slow efforts by the US fed and other reserve banks to print money. So they weren't sure where the "bottom" was or when it would happen. Usually the fed prints money a lot faster and resolve these issues but they were so slow this time round I was advised not to dive in. Which ultimately was a mistake because things recovered fairly normally, but a bit slower than usual. The ASX was back at 5000 within 12 months. But you can't win them all :)

    • congo on 16/01/2017 - 09:36
      +1

      How the hell did he make $2M using 100K capital? That 20 times his capital.
      What shares did he buy? What year was it? How long did he hold his shares for? Did he invest in property?
      I made some money after the GFC, at most doubled my starting capital.
      But no where near 20 times the staring capital.

      • [Deactivated] on 16/01/2017 - 09:52

        He went all out of any shares that lost 90% plus but in companies that looked like they could rebound but to me it was a lucky guess.

        He invested in shares only but did dabble in property after but he has been holding the shares seeing as his making money so its a second income to him now. Ill ask and find out what his put them in but its not all in one company but many.

        • congo on 16/01/2017 - 10:00
          +1

          Thanks. If you could please ask
          1. Which ASX shares he brought
          2. What was his total starting capital

          I would LOVE to make 20 times my investment :-)

        • Rick Sanchez on 17/01/2017 - 23:51

          @congngo: Easy, you can go to the casino and bet 100k on any number in roulette. For every person that goes all out and wins, there's many more that lose! Trade carefully.

      • abb on 16/01/2017 - 09:53

        "He borrowed $100k" doesn't necessarily mean that was all he had.
        Might have already had $500k cash, and/or prior holdings…

        • [Deactivated] on 16/01/2017 - 12:49

          He purchased shares that suffered big time i remember he was telling me of shares that cost $2.25 per share before the gfc but after the gfc they cost 2c per share.

          Really would like to know but the only way someonw will have this opertunity to happen again is for another gfc.

  • indium on 15/01/2017 - 15:44

    Search for phil town rule one podcast, listen to them when you have spare time, especially during transit

  • dylan345 on 15/01/2017 - 18:05
    -4

    buy bitcoin

  • lainey13 on 15/01/2017 - 21:06
    -1

    I opened an account when NABtrade had the offer that ended in November 2016, 3 months worth of free trading. I have a few weeks to go but have already sunked about $20k into almost 30 different shares. I'm a noob but I'm buying for the long term. So didn't buy anything that seemed too expensive, had a 'sell' rating, was heading down. Something that was down on their peak, but trending up. Looked at different websites that recommended listings, and also used the NAB scanner to find companies with large dividends etc.

    • [Deactivated] on 18/01/2017 - 15:13
      +1

      20k spread across 30 different shares is an average holding of $666.66

      Great number.

      However, if, for example, you pay average brokerage of $19.95 when you sell you're paying 3% of your holding to brokerage.

      Good to diversify. But also good to be mindful of transaction costs that impact on your return.

  • owli on 16/01/2017 - 00:13

    Ardent Leisure has filled the gap from the panic sell here, gaps are known to get filled.

    You could try to define your strategy to make it a little more mechanical, do what others have suggested and backtest it.
    Get your google spreadsheet and at least backtest 100 set-ups that meet your criteria.

    I think it would be too hard to do with fundamentals, there are way too many variables and you will most likely have a 'narrative bias' when trading live. I would just focus on price action (the chart).

    As others have also suggested, this is trading, not investing so you need to know where you are going to get out (proved wrong) before you get in.

    Look into basic risk management, the basics are to only risk 1% of your capital per trade, if your capital is not that large, go get more capital first.

    I use Interactive Brokers

    Now go pore through charts that have gapped down after a news event.

  • Hao Pham on 16/01/2017 - 01:02

    Comsef has a free $600 brokerage fee on the first 10 trades on their home page rn you might wanna check it out

  • spammingb on 16/01/2017 - 03:51
    +4

    So where are you keeping this money while you are waiting for a big event to happen? In a savings account right? That's the opportunity cost of this strategy. You're waiting around for this big event to happen when the cash could be invested in other assets and getting higher returns. Also, when this big event happens, how do you know the bottom is the bottom. How do you know when to buy?

    Don't speculate. Park the money in ETFs and just let it be.

  • congo on 16/01/2017 - 07:34

    I used this strategy for MNC and loss $$$$ :,(

  • noyesmaybeok on 16/01/2017 - 11:16

    I'll give you a few examples of "buy after a drop". Going from memory so prices aren't exact but are close. All transactions were reasonably quick, from a day to a few months between buy + sell:

    SGH - Was around $3.80. Had a good report but dropped to $3.40 or similar. I bought in and sold around $5.50
    GEM - Was around $3.20, dropped to $3. Bought in. Dropped further to $2.80, doubled down. Sold for $4 odd
    FGE - Was around $5, sold at $6. Bad news, re-opened at 30 cents. Bought in around 50c, then again 60c. It went up to around $1, then back to 70c where I sold, then back up to around $1.9, then back down. All within a day! Bankrupt very soon after.

    Three I can remember: one of which is now bust, one which isn't far off, and GEM I think is still going ok.

    Definitely a gamble. Also shares under 1 year in length are subject to 50% capital gains or something, in order to try and mitigate flipping I imagine.

    • congo on 16/01/2017 - 12:07

      I think the trick is trying to pick companies that can take a hit and won't go bust.

      • noyesmaybeok on 16/01/2017 - 13:18

        Picking companies that should recover seems self explanatory :D

        Forge had billions of projects on the books. It shouldn't have gone bust; as usual all lies, smoke and mirrors. No doubt everyone involved walked away with no problems as they nearly always do.

        Slater Gordon was meant to be a good acquisition of the UK businesses, turned out they didn't do the most basic of research and it absolutely tanked. Without the acquisition would probably still be going up. This was also ~2013, which was a few years before it tanked. It was running riot, had a good but not 1000000% growth report, dropped, then recovered and almost doubled in not too much time.

        GEM was meant to be fine and is still going along far as I know. They were doing a lot of acquisition to grow quickly which comes with inherit risk (Ala Centro and everyone else who died the minute the revenue dropped)

        None of them were any more risky than the next company. There are a lot of assumptions at play, which is why it's a risky strategy. I got lucky but it could well have been the opposite. 10% skill and 90% luck, "everyone likes this share, the report was quite good, it should have gone up instead of down? Sure it wasn't a million percent growth but it was darn good. I'll take a punt". Not recommended long term/at all really.

        • congo on 16/01/2017 - 14:14
          +1

          Yeah it is not easy. Too many dodgy CEO and business.
          But overall, if you make more wins than loss, then you'd be ahead.
          I think with shares you can't expect to make $$$, but you can plan to make a little, which is better than nothing.

        • noyesmaybeok on 16/01/2017 - 15:24

          With solid long-term strategies and diversification it's a lot easier.

          With these I took a calculated punt which paid off, wouldn't recommend it.

  • congo on 16/01/2017 - 12:04

    BAL went up today.

  • JepunK on 16/01/2017 - 12:34

    Learn some chartings…practice to identify where supports and resistances points are and when you see a share pops on the day…DO NOT CHASE meaning don't buy into the hype wait for it to retrace then buy if you still like the Fundamentals

  • mchoodie on 16/01/2017 - 13:11
    +1

    Also read flashboys to know who is on the other side of your trade and perhaps highlight how futile a "strategy" can be.

  • thydzik on 16/01/2017 - 15:08
    +2

    this really only works for general economic sentiment that isn't a result of the company directly, like the GFC.

    Generally, if a company's share price is down, it is for a reason, i.e. profit downgrade. You would not want to buy these companies.

    you also haven't factored in that the whole index went up about 10% in the last 2 months, ASX200 from around 5150 to 5750 now, so that same gain could be produced by investing in any of the blue chips as well, and they would even pay dividends.

    • Skramit on 16/01/2017 - 15:15

      This ^^^

  • davidosan on 16/01/2017 - 15:42

    I would recommend CMCMarkets - $11 brokerage for non-active traders and $9.9 brokerage for active traders.

    I would recommend that you signup for Commsec to utilise its live trading platform as it is one of the best platforms available in the market for retail investors.

    Please understand that trading is not a thing that you are able to pick up. Before placing a trader please understand that you should be confident in management and balance sheet of the company. Like the many companies listed above - majority of failed companies often crumble under ugly balance sheet with bad cash flows.

    A good example of a strong company is RSG - Despite turning massive losses - management was able to restructure the company (aided with increasing gold prices).

    Your trading strategy of buying sharp falls would only work for Blue Chip Companies whereby management have had many years of experience and have the necessary skills and experience to deal with short term issues. Many companies like: ABC/ANN/CIM/CPU have all recovered despite sharp falls in share price. This is mostly due to strong balance sheet and support from institutional investors that ensure that the share price is stable.

    Depending on your own risk tolerance - you may wish to trade growth assets or if you wish to long - high dividend paying assets.

    If you are looking to enter into the market I would suggest that you wait for the next correction on the ASX before entering long positions as we all know the ASX is currently overvalued.

    The safest trades would be traded around index - you would look for a sharp and oversold correction on the index before entering any long traders. - the alternative is to pick a growing company and long that position until your target return is reached.

    It is also important to understand the share price behaviour of companies- companies that have been listed on the ASX for many years often display seasonal share price or possess trading patterns that are very notable. Most recent example is SRX - it demonstrates a seasonal share price leading to a sharp drop followed by gradual increase in share price. LNG - a well known company for exhibiting 1-2day pumps followed by sharp dumping.

    • ribze1 on 16/01/2017 - 21:55

      Not a stable platform, poor customer service.

      CommSec is worth every cent, not that $19.95 on a $10,000 trade is alot anyway.

      • ragrum on 16/01/2017 - 23:51

        I haven't had any trouble with CMC. When CommSec crashed on the day of the US Presidential Election, CMC was working perfectly.

      • cloudy on 18/01/2017 - 11:27
        +1

        I can't agree with that, I've used both and they both seem the same to me. I much prefer CMC over Commsec.

        At $9 more per trade, assuming ur not a frequent trader, is a lot. in and out $9 each is $18. If you trade in small amounts, which some people do, say $2000 lots, that's almost 1% extra.

        I know many fund managers out there who would pay an arm for a extra 1% outperformance, especially in this low rate world.

        • ribze1 on 18/01/2017 - 22:20

          Agreed. That being said you'd have to be a volume trader to really take advantage.

        • [Deactivated] on 19/01/2017 - 00:00
          +1

          @ribze1: I CAN SHOUT WHILE TRADING IS THAT ALL IT TAKES GREAT IM GOING TO BE A MILLINER.

        • Baysew on 23/01/2017 - 15:26

          @tantryl:

          IM GOING TO BE A MILLINER

          I sell sewing machines, do you need to buy one?

  • zbanga on 16/01/2017 - 16:32

    https://en.wikipedia.org/wiki/Post-earnings-announcement_dri…
    It's relatively common and well known strategy.
    If you want an automated process I would suggest: https://www.quantopian.com/posts/updated-long-slash-short-ea…
    https://www.quantopian.com/posts/quantpedia-trading-strategy…
    Hit me up if you want to know more or talk about it.

    • zbanga on 16/01/2017 - 16:34
      -1

      Also Comsec is horsesh*t,commissions are horrible. They eat you alive.
      Your best bet is discount brokerages or Interactive brokers are decent if you know what you are doing.

  • Cataclysm on 16/01/2017 - 16:47

    small gain for potentially big lose. TOTALLY not worth it.

  • zealmax on 16/01/2017 - 20:22

    The trick is to buy when stock prices are low, and sell when they are high.

  • brainactive on 16/01/2017 - 21:27

    Anyone investing in gold at the moment?

  • worldwidehappiness on 16/01/2017 - 22:04
    +4

    I trade shares for a living. When you know what you are doing it's easy. But beginners normally lose. Your strategy of buying falls is based on noticing a pattern of bounces after excessive drops. But beware of your sample size. So far, you gave us one example. That's a sample size of one. Many people come undone because they might even notice 10 similar winners in a row. But if they checked another year, they'd find the same pattern fails 10 times in a row.

    Definitely check out Hot Copper forum, especially the Short Term Traders thread and the Brains Trust. Beware that the threads for specific stocks are often full of nuts that have fallen in love with the stock, which bizarre, but it happens all the time.

    Some strategies:

    Buy dips on uptrends.

    Buy retraces after a big rise based on a good announcement.

    Average in by putting a little bit on, then a little bit more if it falls, then a little bit more if it falls again. Only works on undervalued stocks. Doesn't work on bad or unpopular stocks, or on stocks that are being aggressively shorted or manipulated down (the oz market is quite lawless).

    Get in on sector runs. This is easy if you get in early. Some examples of big sector runs in the last two years: tech, graphite, lithium, gold, coal, zinc, cobalt, and HR. Uranium stocks had a big run last week. Some of them like graphite and lithium had two or three companies making announcements every morning, and they automatically rose 10 or 20% even if it was nonsense.

    Learn the basics of charting. Mainly, you want to learn when sellers are finished, which is when volume drops off in a pullback.

    Enter good IPOs. In the last two years, many IPOs doubled upon listing. But you can get in after listing too. These have been some of my biggest and fastest wins.

    ****THE BIGGEST CAUSE OF WEALTH LOSS IS SUPPLY (i.e. when there are persistent sellers). So don't buy when sellers are keen. In other words, stock price is based on supply and demand. The situation you want is when there is little supply, but strong demand. Of course, a blow-off top almost always happens, in which case demand and price go parabolic, only to be followed by the pros dumping and the share price collapsing. Don't get caught holding when that happens. It's very dangerous because euphoria is in operation.

    Use stop losses. Hold onto winners until they turn down. Don't hold them forever.

    Happy to answer specific questions.

    • azm on 16/01/2017 - 22:57

      Could you clarify? I am a newbie in share trading.

      "So don't buy when sellers are keen. In other words, stock price is based on supply and demand. The situation you want is when there is little supply, but strong demand."

      It means you make a buy order then cancel it? Or based on a buy/ sell order analysis?

      • worldwidehappiness on 16/01/2017 - 23:08
        +1

        You look at the chart and see if the price is falling with strong volume. If so, then wait for the volume to die right down. If you are a day trader, you might watch the 1, 5, 15, 30, 60 minute chart. If you are a short-term trader, you can just use the daily chart.

  • Eza0o07 on 16/01/2017 - 22:19
    +3

    Speculating the market will end you.

    Time in the market trumps timing in the market.

    • sator on 17/01/2017 - 13:40
      +2

      Don't say stuff like this. People with magic formulas don't want to hear it

  • Tasmaniac on 16/01/2017 - 22:26
    +2

    Invest in your self and/or a gym membership. Your health is your number one asset.

    • mskeggs on 17/01/2017 - 13:57
      +2

      You might live an extra couple of years in abject poverty!

  • chowmanly on 17/01/2017 - 09:53

    If you can pick the bottom it's perfect, but who knows where the bottom is .
    You need to be able to tell whether this is a temporary issue so the shares can recover

  • coinlaundry on 17/01/2017 - 12:28
    +2

    I trade professionally for a living. In my experience it is a dangerous game to buy a falling stock because it appears 'cheap'. Cheap can become cheaper, cheaper can become zero. I've seen many rookie traders (including myself) fall into the lure of this. It's a quick way to ruin if you don't control your risk.

    • cloudy on 18/01/2017 - 11:30

      I'm interested in what and how you trade then.

      I personally back my research and buy cheap, and if it gets cheaper i'd buy more as well. I understand it's not for everyone, hence why I like hearing what and how others do things :)

      • coinlaundry on 19/01/2017 - 23:05

        I have experience trading a range of asset classes on behalf of institutions as well as my own personal account. My strategy is based off momentum - simplistically put: buy what goes up, and sell what goes down. It is the opposite of what is being discussed by the OP and others in this thread - buying beaten down stocks, buying even more / doubling down if things get cheaper. Yes, this sort of investing can work, but I've seen many talented traders go broke by stubbornly owning 'blue chip' companies with the view that 'they will never go bust' / 'they'll bounce back eventually'. These companies can be awful investments if they are bought at the wrong time.

        There are many examples of top shelf 'blue chip' companies which had their prices destroyed - Coca-Cola fell from grace in the 70s and took more than a decade to break even. McDonald's fell over 70% during the dot-com bubble. General Motors, Lehman Brothers - these were all household names and they went to zero.

        What's worse is that most of the punters with the mindset of holding on to 'safe stocks' believe in patience is prudence by way of quality. My mentor (a great trader) was adamant that this showed a distinct lack of strategy, or just plain laziness. Often these punters would trade without any regard to a stop loss - which is against the #1 rule: always protect your capital.

        Timing an entry to buy is only one component - you need to have careful management of risk, position sizing, exit strategy (which should be pre-determined). If there is one takeaway from my trading experiences - find a setup that works for you and stick to it. It's also hard enough mastering the trading of one instrument. I've seen a number of decent traders make the error of trading too many markets at once - FX, equities, commodities, bonds etc. and missing some great opportunities elsewhere.

        • cloudy on 20/01/2017 - 10:28

          With your type of trading, do you use leverage and large positions and try to make a small percentage to make a decent amount?

          With stop losses, I find that it's a to way sword. Have a tight stop loss and u stop losing a lot of capital, but u end up being stopped out frequently. Have a looser stop loss and u don't get stopped out as much but ur losses are larger. So there is no gain from it, it's just trading off more reward for risk. Zero sum game ur playing with yourself.

        • coinlaundry on 20/01/2017 - 12:16

          I don't use leverage. There are three possible outcomes to my trades: 1) small loss, 2) small gain, 3) large gain.

          Many traders don't know their average % gain/loss and their hit rate. The way I trade, I can be wrong 2/3 times and still not get into a serious hole. I can trade at < 50% hit rate and still be ahead over time. Avoiding the large losses which are larger than your average % gain will keep you alive in the long run. Trading at > 75% hit rate but losing significant chunks of your capital on your losers can get you into a serious hole.

          If you get stopped out frequently, it is either 1) stock selection criteria needs refining or 2) unfavourable market environment. Additionally, this does not prevent you from buying the same stock again. Some of my best winners were in stocks that I was stopped out on multiple times, but re-entered at a later point when the setup looked attractive again. It is similar to catching a big fish, sometimes it takes a few times to reel it in.

  • [Deactivated] on 17/01/2017 - 12:29
    +1

    you are trying to catch a falling knife.

  • garethb on 18/01/2017 - 13:09
    +1

    A good strategy and I use it a bit (mainly on stocks in ASX200 cause I'm cautious). But the biggest problem is guessing when the bottom is and hoping more bad news doesn't follow.
    Last year, most noticeable were

    Dick Smith - Worked, made 20% in a few days.
    Fortescue - Worked, made 20% in a few days.

    Spotless Group - Didn't work, lost 25%, bought what I thought was the bottom but was wrong. Bought more when it really did hit bottom to bring my average price per share down, still down over 15% but I think still a good stock to hold
    Suncorp - Didn't work, down over 15%, past hinted that Suncorp bounces back relatively quickly after a flood so bought after some floods (insurance companies don't so well after disasters) after what I thought was bottom, but then more floods came later. Still holding these and almost back to evens after a year (dividends paid though so not bad, plus I bank with them so was planning on buying some anyway).

    If you're cautious like me, best bet is to buy when you think its bottom with half your investment, if you are right, sweet, if not, wait till the actual bottom (guess again) to bring your average down. You won't make as much, but you won't lose as much. And if you're correct in guessing the bottom, you at least still have half your funds to look for another bargain buy that just might work out better!

    TIP: Make sure you don't only have one strategy! Use this along with others. And if you're starting out, only trade within the top 50 till you get the hang of things. And don't hold onto a loser! I know I'm holding Spotless and Suncorp but these are business I think are good buys still. If that changed, I would sell at a loss in a heartbeat!

    • Skramit on 18/01/2017 - 15:48

      A good example of an ASX200 stock was BHP last year. Fell to $16 on the back of the dam disaster and payout. But the financials were and are still very good and what a surprise it's now back to $26 :)

  • ggrant on 18/01/2017 - 19:32

    Probably mentioned already. Your idea is ok. But seriously stick with Blue chip, or other companies that you have researched are financially sound.
    In 1990's my first trading went well making $3500 in a few months then, a company delisted without notice, and I lost the whole $ gain.
    Suggest stick with longterm proven methods, do the research work, unless you need/want to play aggressively.
    Good luck ;-)

  • holdenmg on 18/01/2017 - 22:26

    Hi,
    Noticed this article in The Australian:

    "Fat Prophets seeks up to $33m in fund IPO"
    http://www.theaustralian.com.au/business/financial-services/…

    Interesting Contrarian approach.

    • mskeggs on 19/01/2017 - 07:46

      When stockbrokers/analysts etc. list, it is a signal the market is fully valued. See BFG as the definitive example.
      A bit like McGrath's real estate float.

      • holdenmg on 19/01/2017 - 08:01

        Sure, my thoughts exactly, I wasn't recommending it or anything…

        Just interesting to look at the IPO document and see what their about.

        That McGrath Real Estate thing was a mess wasn't it.

    • jhmtaylor on 12/02/2017 - 11:14

      You should read up on the last time Fat Prophets listed an LIC. It was a total failure.

  • brainactive on 11/02/2017 - 17:03

    Dominoes share price - crazy increase over the past year (almost doubled in 1 year), increased about 15-fold since 2010. Wow, those 5-dollar pizzas are really working

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