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The importance of Timing!
- Consider a roller from our
archives in the chart below. We see the rolling pattern in
about a 40 cent channel centered at $1.20. This stock had tested a support level at $0.95
three times in a couple of months, then drifted upward, maintaining a resistance level at $1.40. It seemed to then suggest a new support about 10 cents above the previous level.
Click image to enlarge
- We put this ticker on our rolling list in part because of strong technicals that told us it was going higher soon. On that Friday we felt like it was a good bet to go up from where it was even though it was not at the bottom of its channel.
- To get to our point on timing, let's ask what would have been a good target sell-point if we had bought on that day, or "what is our exit?" Rule 3 in the Rolling Stocks tutorial has us select conservative preliminary Buy and Sell signals and estimate a rate of return. In our case the closing price on that Friday for (VMRX) was $1.19. A conservative Sell level would be between $1.30 and $1.40, returning 8.5% to 17.6%. Let's split the difference and shoot for $1.35 which would return 13.4%.
- Next, what is our exit on the downside? If the stock just starts going down, where do we bail out? For this example let's use 30% ($0.83) as the downside exit. This level must be one you are comfortable with. Just decide what that is before entering the arena. We now know what we are going to do regardless of which way the market turns.
- We can enter the order as a "market" or a "limit." On a "market" order we agree to buy the stock at the current market price, whatever that is. A "limit" allows us to specify what we will pay for the stock. If we place the order in the evening waiting for it to be filled the next morning when the market opens, a market order may surprise us. The "open" price is not always what the "close" was the day before and we may pay more than planned (or less). But, a limit order may not get filled and will usually cost us a little more as well. This is an important decision we must make.
- The market maker sets the price where he will sell (this is where we buy, called the "ask") or where he will buy (this is where we sell, called the "bid"). A quotation lists the stock trade price, the higher (ask) price where we buy or the lower (bid) price where we sell. The difference is how the market maker earns his money. He is buying low, selling high!
- Brokers usually do not make money on limit orders, where we specify that we want to buy (or sell) a stock only at a certain price or better. That's why many online brokers charge extra for limit orders and why it may cost us to guarantee that we buy (VMRX) at $1.19 as shown above in item 3. Many on-line brokers charge an additional $5 for a limit order. (Shop around, a few do not charge a limit premium)
- All that behind us, lets see how we did. The next chart
shows price performance from
our
buy-date (10/30/98) to the second week in December (the
arrow identifies our entrance).
This is a "Candlestick" chart showing the open, high,
low, and closing prices, in a way to
show the relation between the open and the close.
The body of the candle shows the
difference between the open and close price for the day,
white if the close was higher
than
the open, black if the stock lost during the day. The
whiskers on the top & bottom
(called
the upper and lower shadow) represent the high and
low during the session.
Click image to enlarge
- We see from this chart that the price closed above our $1.35 price on November 10. On that day, had we sold the stock for the closing price of $1.41, our return would be $0.22 or 18%, excluding commission (a $1000 investment with $12 commission twice would still return 16%).
- Looking back, our choice of a $1.35 may have been too conservative. We might have observed that the higher support level should have pointed us to a higher resistance level as well. Had we chosen $1.45 as a sell it would have occurred on November 12th with a close of $1.50 giving us 23% after commission; 23 x 365/13 = 646% APR. Not a bad return in 11 days. But "not bad" compared to what?
- First convert this return into an Annual Percentage Rate (APR): 16% * 365/11 = 530% APR. APR does not mean it must roll for the entire year but it gives us a valuable benchmark for reference. For instance, which return is better; 18% in four weeks or 24% in six weeks? The 18% is 234% APR while the 24% equals 208% APR. Time plays a critical role! To achieve an actual 530% APR at the end of the year we would have to repeat this experience on (VMRX) 33 times.
- The point on timing lies in our ability to do three things:
- Select buy/sell channels that will provide the greatest number of buys and sells during the roll of the stock. We can wait for the home run or we can beat out a lot of one and two base hits.
- Keep our money working for us, that is, when we have sold a stock and have money waiting to invest, have alternate rollers we can dump the money into while we wait for the one to roll down to a buy level. We call this staggering and it allows us to keep several rollers in play most of the time.
- Let the computer do the walking with Good Till Cancelled (GTC) orders where we define our sell points and not have to keep glued to the computer screen 8 hours a day. That frees up our time for more profitable activities.
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