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Don’t shoot until you see the whites of their eyes – wait for my 3B signals before you buy

May 29, 2022

I have always been conflicted in my ideas about the best way to invest. One strategy, which works very well during a bull market, is never sell. Shares can rise a very long way for a very long time. If you never sell you capture all those gains.

But it is hard not to feel differently when a severe bear market strikes. Suddenly selling seems a good idea. This brings into play my time in the sun strategy. Every share has its time in the sun when business is booming and it is attracting a growing crowd of enthusiastic believers in the story. During this period the chart will show a strongly rising trend as buyers overwhelm sellers. That is the time when you want to hold the shares.

Shares typically overshoot both up and down. Add this to the strong momentum driven by rising sales, a growing business and very often a rerating and shares can rise an incredibly long way. But eventually they stop rising and the whole process can and often does go into reverse. So how do we capture the good bit when the shares are rising and avoid the bad bit when they fall and may even collapse.

This is where charts can help and in particular the 3B buying system I have been developing. There are three bits, duh, to the 3B buying system – a broken downtrend line, a golden cross by the moving averages and a Coppock buy signal. My idea which I am developing is that a bit like my 3G system for choosing shares you use my 3B buying system to decide when to buy and hold shares.

The strategy is illustrated above with the chart of Zoom Video Communications. In it I make one crucial but reasonable assumption. Coppock needs quite a lot of price history before you can start doing the calculations but it is a safe bet that it would have been rising during the earlier periods when Zoom shares were rising strongly so we could have taken the decisions based on my other two indicators.

We then use the triple package, broken uptrend line, dead cross on the moving averages and falling Coppock, to sell. This would have been a profitable strategy because we would have captured a big chunk of the gains between floatation and the summer of 2021 and we would have been out of the shares thereafter avoiding the subsequent collapse.

Another example of the strategy in action is Paypal. We buy on the first important breakout when all the stars were aligned in the form of my 3B buy signals and we also had a pattern breakout so a 4B buy signal. We then sold when my indicators turned negative in late 2018. This sale was too early and given everything else that was happening we might not have done it but let’s assume we did and stayed out of the shares until the next 3B buy signal in May 2020. The shares rose strongly and the next triple indicator sell signal came close to the peak and before another share price collapse.

Note that the blue lines refer to buy signals and the red lines to sell signals. So a move upwards through a blue trend line is a buy signal and a fall down through a red line is a sell signal. Similarly I have marked in the Coppock signals with vertical lines, blue for buy and red for sell. Coppock himself didn’t use his indicator for selling decisions or for individual shares so I am enormously extending the reach of his system. We will learn as we go along how well it works but I have great hopes.

The moving averages work by giving golden cross buy signals and dead cross sell signals. A golden cross buy occurs when the shorter moving average, marked in blue, moves up through a rising longer period moving average, marked in red; vice versa for a dead cross sell signal.

The power of the system is the requirement that we only act when all three indicators are signalling together, which doesn’t happen very often. As can be seen below it has only happened twice with Tesla in over a decade. There is nothing to stop you buying after the initial signal but while all the indicators are rising in tandem; that can work too.

Now let’s look at Tesla. Again the strategy works well with just two buy signals from my strategy. We are out of the shares for a long period between 2014 and 2020 when we could have been doing other exciting things with our money but we are in for the two periods of strongly rising prices, the day in the sun periods. We sold too early, the classic Rothschilds ‘mistake’ but we have done very well and we’re out now when the shares are looking vulnerable to a severe decline.

Just for clarity in this strategy buy signals only occur when you are out of the shares. This is different to my never sell accumulator strategy when you buy more on each buy signal and these occur much more frequently. The trading strategy involves buy and hold as long as the shares are rising strongly and selling when Coppock and my other indicators tell me that this bullish momentum is fading or going into reverse. We then buy back again when we get another strong buy signal. Because Coppock is involved and tends to move in long swings up and down this (a) reduces the number of signals dramatically and (b) means you are out of the shares when nothing much is happening or when they start to fall.

It can also mean, as has been happening over the last few months of falling markets that there are periods when we don’t do much of anything at all.

I need to remind you of my merchant banker rule, that we are all geniuses in hindsight. It helps enormously when drawing lines on a chart if you know what is going to happen next which is why I am reluctant to do it. However my 3B strategy is not based on predicting the future and pretending that we know what is going to happen next. It is pure logic as Mr Spock said so often on Star Trek.

My proposition is that if you only buy on a strong, unequivocal buy signal, my 3B signals when three of the stars are aligned, you will often capture periods of strongly rising share prices. You can then use similar logic to decide when to sell. As we can see you will often sell before the peak or after the peak but what you will do is safely capture a big chunk of any gains made by the shares.

You will also release your money from shares that are not doing anything much and that makes the funds available to invest in shares where exciting things are happening.

Another key consideration, especially for me, is that this strategy makes it much easier and safer to use leverage. I invest by making spread bets with five times leverage on IG. The only shares I buy on my share account are QQQ3, an ETF tracking the Nasdaq 100, with built in leverage, which is not available to be bought on leveraged accounts.

Five times leverage has an an incredible multiplier effect on your gains. This will all be discussed in future issues as will how to open and use a spread betting account with IG. As a taster, in the case of Tesla, using spread betting and my trading system would have multiplied your initial investment 500-fold with comparatively low risk if you had bought on the initial breakout. In any case, as a beginner, you are guaranteed by IG that the most you can ever lose is your initial investment.

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