Essentially, CommandTrade is a personal form of program trading. Many institutions have programs to identify trades that are executed automatically when the triggers are hit. CommandTrade tries to give the retail investor the same tool.
I spent considerable time on the company web site trying to find out just what kinds of criteria the system could accommodate. The system tutorial had the most information. It seems to me that the tools are primarily trend following and that they are fairly basic. If you like those tools, this may be a good system for you. But, the web site could be MUCH more informative.
I compared CommandTrade to the grand daddy of automated trading systems, Trade Station. The Trade Station web page is very useful. It tells you exactly what is available. The criteria available for traders to set up is almost unlimited and it has over 100 preset tools to use including trend following, oscillators, momentum indicators, earnings, etc. You could easily use Trade Station to follow Bob's 5 Bar Look-Ahead system. You could not do the same on CommandTrade. Pricing is competitive between the two systems (you can subscribe for free if you make just a few trades a month.)
In my opinion CommandTrade has made a good start, but still needs to grow and develop some more to match the power of Trade Station.
MODIFIED DOLLAR COST AVERAGING
==============================
This trading system technique is NOT for the amateur! When you have become intimately familiar with your market-timing software, AND you have a well-ballanced portfolio, AND you have become expert in using Long Term Values or the BLUE BOOK, AND you are experienced in using charts, THEN you may be ready for this extrememly aggressive trading system technique. After all of this, you must ALSO have a cast iron stomach and nerves of steel. These things only come with many years of experience and seasoning.
Introduction
------------
The popular method of making money in stocks is to buy high and sell higher. Protect your profits with trailing stops or trendline breaks, etc. These popular methods work. In my opinion, any disciplined approach of buying low and selling high that works is a good approach. I use every tool at my disposal to generate cash profits. I certainly use the above popular methods as well. In addition, if you have read my posting on various trading strategies, you have also seen some tools that are not utilized anywhere else (as far as I know) such as the EARNINGS BANDS and MODIFIED DOLLAR COST AVERAGING. The more tools that you have in your trading toolbox, the better your chances are of reporting profits on your 1040 tax form each and every year. There is a time and a place for MODIFIED DOLLAR COST AVERAGING, just as there is for any other powerful trading tool.
What Is Plain Dollar Cost Averaging?
------------------------------------
The STANDARD dollar cost averaging system requires that you invest a fixed amount of money into a stock at regular intervals for an extended period of time. Most experts agree that this system works extremely well. And I agree with them (at least, in THIS instance). It works because when the stock is DOWN you buy more shares. When the stock is UP you buy fewer shares. At the end of the year, you can see that your AVERAGE price is weighted toward the LOWEST price of the year. We are more interested in the AVERAGE PRICE than the price paid for each share. Corporate stock repurchase plans have been extremely profitable and the reason is simple: Dollar cost averaging WORKS... AS LONG AS THE COMPANY DOES NOT GO OUT OF BUSINESS.
MODIFIED dollar cost averaging is very similar. You still buy MORE STOCK when the price is DOWN, and less when the price is UP. However, this system works because it takes extreme advantage of the WIDE PRICE SWINGS that most stocks normally encounter. It is IMPERATIVE that you have a subscription to a long term chart book such as THE BLUE BOOK or LONG TERM VALUES to see for yourself how well this system works. Open up your chart book to ANY STOCK and observe how often high quality stocks drop 30% in price. See how frequently a HIGH TECH high quality stock drops 50% or more in value. Hence the 30% rule and the 50% rule. We hold back our cash and wait for the expected drop BEFORE buying more stock.
Notice the WIDE FLUCTUATIONS where the decline is always followed by substantial rebounds, often 100% or more. Even SICK stocks which have reported deficits on bad news have major rebounds of 50% or more. The MODIFIED DOLLAR COST AVERAGING takes full advantage of this volatility.
Why are so many stocks so volatile? There are MANY factors moving the price of a stock. SHORT SELLING is one of the major forces moving your stock UP after any major decline. The short seller must BUY to close out his position. He may have sold short at $20 and is looking to buy in the $10 area. He made his profit and wants to take it BEFORE THE STOCK GOES BACK UP. A large number of short sellers trying to buy low sends the price of a stock soaring! Bargain hunters are adding to the pressure. So too are the holders of PUT options, mutual funds, etc.
This tool not only can generate HUGE PROFITS, it also helps to provide market STABILITY. Your dollar cost averaging actions help to limit excessive stock price declines. In addition, it also provides a more stable portfolio because you will own MORE stocks with much smaller positions.
So here is my in-depth explanation of MODIFIED DOLLAR COST AVERAGING. Included are two spreadsheet templates used to calculate your VITAL BREAK EVEN POINT for any investment. We don't really care what price we buy our stocks for. We are instead CRITICALLY INTERESTED in the AVERAGE PRICE, otherwise known as the BREAK EVEN point.
OBJECTIVE: Maintain the break even price as close to the LAST PURCHASE PRICE as is practical within the limits of your budget and portfolio.
The following files should be loaded into your favorite spreadsheet, such as Lotus 123 or Quattro or Excel:
Average1.wks = Lotus spreadsheet template detailing a chart of prices and dollar cost averaging points.
Average2.wks = Lotus spreadsheet template that calculates dollar cost averaging points for any size initial investment, and any amount of averaging. Simply enter the variables and see your average points, break-even prices, and required financial liability.
(These two Lotus spreadsheet templates have been sent to Larry Stay as email attachments for distribution to anyone who reads this and cares to obtain the templates by requesting them from Larry).
This approach has proven to be an extremely profitable tool. However, as always, risk of loss is ever present, and this approach MAGNIFIES YOUR LOSSES (as well as your profits) exponentially. If you are faint-of-heart, or can suffer from sleepless nights worrying about your money, then you are NOT yet ready to use this aggressive trading strategy!
KEY POINT #1: If you use this approach, you should be EXTREMELY careful in your stock selection. Your biggest (and only) loss occurs if the company that you invest in GOES OUT OF BUSINESS, or becomes so sick that there is not at least a dead cat bounce in its stock price.
KEY POINT #2: In actual practice, companies rarely go under. The banks simply will not allow it. They may change their products, they may be taken over, they may merge, and they may even declare chapter 11 reorganization for self-protection. A well chosen investment is not very likely to go out of business. Your stock selection is so important that it can mean the difference between a total loss and fantastic profits. The modified dollar cost averaging approach is a GO or NO GO approach that can generate substantial profits over and over again... AS LONG AS THE COMPANY STAYS IN BUSINESS.
Things To Look For When Selecting Your Stocks
---------------------------------------
1. Little or no DEBT. Companies with a healthy balance sheet rarely go out of business.
2. Earnings are PARAMOUNT. Companies that make money year in and year out rarely go out of business. Stocks without a proven track record of earnings should be avoided like the plague. I even use this approach on stocks that get into trouble with reported deficits, as long as they have HAD a good track record in the past. Most companies can fix their problems and get back into the black sooner or later.
3. PE Multiple is extremely important. DO NOT buy a stock with a PE multiple that exceeds the 5 year growth rate! The key to the success of this strategy lies in buying a stock that is at least FAIRLY PRICED, and becomes a bargain during the dollar cost averaging process. Consider, for example, a stock selling at $30 and 80 times earnings with a 20% growth rate. How much is it worth? It is only worth $6 at most, and at $30 it is priced to the MOON. I would not buy it at all, much less entering into the modified dollar cost averaging rules with it.
4. Pick companies that have a long history of GROWING earnings. Consistent GROWTH is the mark of a successful company that is not likely to go out of business. It also is the mark of companies that are the most popular, year in and year out.
5. Select the leading stock in its group. POPULAR stocks that have a wide following usually have the best rebounds from "BAD NEWS" designed to drop their prices.
The above points are important in ANY good investment. However, they are critically important when using MODIFIED DOLLAR COST AVERAGING, since you may be pouring LARGE amounts of money into a few stocks.
KEY POINT: If you start using this approach, don't chicken out after the 1st or 2nd dollar cost averaging point is reached. As you can see from the spreadsheets, your BREAK EVEN POINT is always slightly above your last purchase price. Failure to follow through on an averaging-down-price will place your BREAK EVEN POINT too high to turn a profit on the next rally.
METHODS TO IMPROVE PERFORMANCE
------------------------------
Get in the habit of drawing TREND LINES on your stock charts. Many stocks will stay in downtrends for their entire decline. Don't average down until it has exceeded your selected rule (30% or 50%) AND has broken the downtrend line also. By following the downtrend line, you can sometimes buy the stock AFTER its entire decline is behind it, thereby reducing your financial liability required to achieve a low break-even point. Your METASTOCK charts are simply worth their weight in gold for tracking such things as trendlines and moving averages.
DISADVANTAGES TO THIS APPROACH
------------------------------
The perfect trading system does not exist. Every approach has distinct disadvantages, and the MODIFIED DOLLAR COST AVERAGING system is no exception. Be aware of the potential problems BEFORE using this strategy...
1. Popularity
--------------
Unfortunately, your stock will likely have dropped out of favor. You may have to wait months or even years before your massive holdings again become popular. Again your stock selection must be excellent. A good stock will regain its popularity much sooner than a dog. However the huge profit potential can make the wait worthwhile, particularly if you are already a long term investor.
2. Market Sell-Offs
--------------------
At certain times, the market goes into a tailspin and EVERYTHING drops 30% or more. This is the normal 4 year cycle and it can be expected. The last two major corrections were in 1990 and 1993-94. Since this approach requires an exponential investment at regular price intervals, you cannot use it on all stocks in your account at one time.
3. Initial Investment Size
---------------------------
This approach must be planned for. ALL of the stocks in your portfolio must be kept "manageable." You may not feel comfortable with a $6,000 initial investment if you must then follow up with $6,000 - $12,000 - $24,000 - $48,000. However, you may feel VERY comfortable with an initial investment size of $1,000. The follow-on investments of $1,000 - $2,000 - $4,000 - $8,000 may fit well into your portfolio's other holdings.
4. Margin
----------
In order to make a $8,000 investment into a single stock, you may need to use margin... BORROWED MONEY. If you are heavily into margin, AND a major market correction occurs, your entire portfolio can be WIPED OUT. DO NOT use heavy margin to implement modified dollar cost averaging. RISK NOT THY WHOLE WAD.
5. Cash Reserves
-----------------
If Margin is out, where does the money come from for this approach? Answer: Cash reserves left in money markets and from selling other stocks in your portfolio that may have gone up too far too soon. In addition, SMALL amounts of margin can be used.
6. Portfolio Balanced
----------------------
This approach works best in a portfolio containing MANY stocks. All stocks selected per the rules... All excellent growth stocks with little or no debt, and so on. In such a portfolio, a SMALL percentage will become too expensive and should be sold. A SMALL percentage will drop far enough to meet the dollar cost averaging rules. Most of your stocks will simply grow within their EARNINGS BANDS at the proper rate and can be LEFT ALONE.
7. Seasoned and Experienced
----------------------------
THIS APPROACH IS NOT FOR THE TRADER JUST STARTING OUT! This approach is easier for the older and more experienced investor. The wisdom of many trades and the years of experience selecting GOOD stocks is essential before considering this approach. It takes many years to build up the proper sized portfolio in order to reduce your risk. It may take several more years to acquire the right frame of mind to treat real money with the same emotion as playing Monopoly.
8. Practice
------------
PROVE THE CONCEPT TO YOURSELF BEYOND THE SHADOW OF A DOUBT. Before using this approach, open your chartbook and pick any good stock at random. Apply the rules and count your profits with paper trading. Lay into it with a dozen.. fifty... even a hundred or more stocks. Prove to yourself how the fantastic profits come your way over and over again... every time and without fail! When you are TOTALLY convinced that this is the most profitable trading strategy that you have EVER USED, then you are probably ready to use it.
You simply will NOT be able to pour money into a declining stock until you have TOTAL CONFIDENCE in the fantastic profits this strategy can provide. The worst possible thing to do is to lay thousands of dollars into one or two levels of averaging and then "chicken out." Almost EVERY stock has significant and massive price rebounds because of short covering, mutual fund purchases, and bargain hunters like me. Remember... the most mundane rally places your position into a HUGE profit slightly above each dollar cost averaging level.
9. Conventional Wisdom
-----------------------
This strategy is completely the opposite of conventional wisdom. Many will say that it is financial suicide. Never throw good money after bad. Always cut your losses short. ALways use a trailing STOP LOSS ORDER. Never sit on a losing position. Always sell 5% below your purchase price. Always sell 10% below your purchase price. Always sell on a Head and Shoulders breakdown. Always sell on a moving average breakout, etc., etc, etc. There is almost no limit to the variety of conventional wisdom rules that we are exposed to. They all have ONE thing in common: cut your losses short and let your profits run. BUY the WINNING STOCKS and SELL your LOSING stocks. These conventional wisdom rules do work some times. Like anything else, they sometimes work and they sometimes don't work. THERE IS NO SUCH THING AS THE HOLY GRAIL IN TRADING SYSTEMS.
Let's examine conventional wisdom a little more closely. If you are an experienced trader, you will likely smile at these comments.
* Establish a trailing stop loss 5% below your purchase price. You buy a stock at 20, and 5% of 20 is 1 point. You place a trailing stop at 19. And you know what happens? I absolutely GUARANTEE that if you enter a 5% stop loss order, the market maker is going to swoop down and grab your stock within the very first hour of trading! You have now lost 5% and the commission. Ditto on a 10% trailing stop. Stocks go up and down 10% on a routine and regular basis, as the market makers match buy and sell orders. Now you get more serious about it, and place your trailing stop at 20%. Your $20 stock drops $4, you lose it, and then it soars to new all-time highs.
RULE: Before any major advance in a stock, there is FIRST the big move down to clear out all the trailing stops!
It takes a 30% profit to offset a 20% decline, pal. It takes a 100% profit to offset a 50% decline.
* Sell on a chart formation breakdown. Again, the market maker knows all about chart formations. Did you think that this was some sort of proprietary information, known only to a few of you? More often than not, there is the FALSE BREAKOUT designed to grab YOUR STOCK!
* Buy and Sell on moving average crossovers. This one is easy to disprove using MetaStock software. It is just another way of buying high and selling low.
* BUY WINNING STOCKS and sell your losers. This is just another way of buying high and selling low. Winning stocks can only be seen AFTER THEY HAVE MADE THEIR MOVE! By the time you buy, the stock's move is about over, and it soon goes into decline. Selling your losers means selling low.
* BUY HIGH AND SELL HIGHER. This one admits right off the bat that you are buying high in the first place. It is, in fact, the greater fool's approach. If I pay a high price to buy it, then there is SURELY a greater fool out there who will pay me even more!
Computer trading is MASSIVE. Computers are everywhere now. They are all programmed the same way... TO SELL ON TREADLINE BREAKS or MOVING AVERAGE CROSSOVERS. Sell quickly before the price goes down any further! The result of all this computer trading is the MINDLESS SELLING of very good stocks. Put all these mindless computers to work for YOU. When they are selling at bargain prices, YOU can be the one scooping up the bargains INSTEAD OF (or in addition to) the market makers. You can be the one BUYING LOW and selling high. When your stock breaks out on the UPSIDE of a popular chart formation, YOU CAN be the one SELLING to the technical trader at HUGE PROFITS. Or maybe not.
Posted by: Bob Hansell | March 28, 2006 10:29 PM | Permalink to Comment