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Opinion

Don’t shoot until you see the whites of their eyes

May 30, 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.

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.

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