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Lesson 19: 139 Trades

Our hypothetical Investor, Mrs. "B", is a conservative lady, age about 45, who has invested in the stock market, futures and options contracts for years. For the purpose of this example only, we are going to take a look at her hypothetical purchases of corporation 101 shares in the years between 1990 and 2000.

Investor B calls herself a 'method' investor. The method she uses for investing is very simple. She runs a 10-day and a 45-day moving average line. Whenever the near-term trend shows price strength, she considers (though she doesn't always do so) buying shares of any corporation or any commodity futures contract or any options call contract. When the reverse is true, she sells out her position or considers going short.

In early 1990, shares of corporation 101 started to show price strength. The forty-five day average price of corporation 101 shares was near $3. The ten-day average price of 101 was $3.25. When the ten-day line crossed above the forty-five day line Mrs. B hypothetically bought one thousand shares. She would hold those shares for nearly ten years. She would hold them until the ten-day moving average line of corporation 101 shares closed below the forty-five day moving average line for the shares of that same corporation. When this happened, she would sell all one thousand shares of stock. This day came in 1999 and Mrs. B sold for a profit of around $87 a share. She made over $86,000, net after commissions, and was a very happy lady.

 

After she sold, between July of 1999 and June of 2000, the ten-day moving average line for corporation 101 shares stayed below the forty-five day moving average line and Mrs. B stayed out of the market. Mrs. B does not like selling stock short. She might sell futures contracts short and she might take put positions in the options markets, but she does not like selling shares of stock in a U.S. corporation short. It would be like 'betting against America', is how she puts it. and she will never do that. Mrs. B buys shares of stock in bull market cycles and stays out of the stock market entirely during bear market cycles. After she sold her shares of stock in 1999, Mrs. B put her $86,000 profit in the bank and did not buy another share of stock of corporation 101 between July of 1999 and June of 2000.

Contrast the two investors: The 'market' investor Mr. A who traded only corporation 101 shares and who bought on every dip and the 'method' investor Mrs. B, who would buy shares of any corporation whenever the ten-day moving average line crossed above the forty-five day moving average line for the corporation she was buying.

Between 1990 and 1999, Mr. A made 55 purchases of shares of stock of corporation 101. Every single purchase resulted in a profit. He made 55 purchases in a row and he made 55 profits in a row. Quite a record for a 'market' investor and Mr. A was proud to let everyone, including his friends and neighbors, know how great his investment record was. Each time Mr. A bought, he would buy 500 shares, one half the amount that Mrs. B traded. When he first started buying, at around $3 a share, the purchase price for his 500 shares was only $1,500. By the time he made his 55th purchase, he had available all the profits from his 54 previous trades to fund the shares he bought at $90. By the summer of 1999, Mr. A had earned $275,000 from his stock purchases, not factoring in any commission costs. Mr. A was a happy camper.

Eleven months later, by the summer of 2000, Mr. A had made an additional 83 purchases of corporation 101 stock, for a total of 138 separate transactions of 500 shares each. Now, however, in just eleven month's time, each of Mr. A's 83 most recent purchase transactions showed a paper loss. I don't know for sure how much money Mr. A had lost on paper by the summer of 2000, but it certainly was all of the $275,000 he had made during the previous ten years of trading 101 stock. Buying on each dip and selling at prices $10 per share higher had worked for nearly ten years, but it did not, however, result in a net profit when the eleventh year was considered.

Mrs. B, as we noted, made just 1 purchase and 1 sale of shares of stock of corporation 101. She bought in 1990 and she sold in 1999 and she has remained on the sidelines ever since. Contrast the track record of the 'market' and the 'method' trader during these eleven years.

    Market trader Mr. A.

  1. 55 profitable transactions. Realized profit estimated in excess of $250,000.00.
  2. 83 unprofitable transactions. Unrealized loss well above $250,000.00.
  3. Track record as of July of 2000, 28 net unprofitable transactions. (83 unprofitable minus 55 profitable trades).
  4. Best hope for recovery for Mr. A is for corporation 101 stock to move from $20 a share to above $60 a share.
  5. Chance of this happening? Unknown.
  6. The trading losses Mr. A will suffer if he is ever forced to sell his shares of stock below $20 a share. Huge.
  7. Net result of ten years of Mr. A's life: A negative 28 trades and a significant unrealized loss.

Mrs. B has a more enviable record.

    Method trader Mrs. B.

  1. One profitable transaction.
  2. No unprofitable transactions.
  3. Overall net, approximately $86,000 in profits.
  4. Unrealized net loss, none.
  5. Mrs. B. has set her profits aside and may never trade shares of corporation 101 again, certainly not until the ten-day moving average line crosses above the forty-five day moving average line for the value of that corporation's shares.

Mr. A certainly had more activity in his account than Mrs. B. did. If you like action, Mr. A had plenty of that. In a little over ten years, he was able to make 138 trades in his investment account. Mrs. B made only 1 trade in those same ten years. Together they made 139 trades in the shares of corporation 101. Mr. A had more profits than did Mrs. B, he made over $250,000 as compared to her $86,000. But Mr. A is not yet out of the woods and Mrs. B is. Mr. A has unrealized losses so staggering that he does not want to even considering adding them up. His losses, if he is forced to realize them, exceed his profits several times over. Mr. A is not a happy camper.

 

There is an independent observer who has been watching all this and who is closely studying the trading habits of both Mr. A and Mrs. B. We will call this independent observer "C". What can C learn by studying the records of our 'market trader' and comparing them with the records of our 'method trader'? Better yet, what can Mr. A learn from studying Mrs. B's trades and what can Mrs. B learn from Mr. A's trades? Another question might be what can we learn from A and B and from C?

 

We will look at this in the next lesson. Before we get to lesson number 20, however, take a look at the chart of September 2000 corn futures as of August 18th, 2000. Look at that chart very carefully and ask yourself this question: What if you had used Mr. A's program of trading nothing but one market (corn) and had purchased September 2000 corn on every three-day dip and sold on every 10-cent bulge - How many successful trades might you have made between October of 1999 and May of 2000? If you spend a little time on this, you will find that you would have had quite a few successful trades, just like Mr. A had when he bought corporation 101 stock between 1990 and 1999? Then ask yourself this question: If you had continued this program of trading only September 2000 corn, buying on the dips and selling on the 10-cent bulges, how many successful trades would you have had in the four months of May, June, July and August of 2000? Can you locate any? Was there even one successful trade between May and August of 2000?

The final question would be, if you used this program of trading one market only, buying on dips and selling on bulges, how large would the unrealized loss be in your account as of August 18th, 2000?

 

Be sure to study closely the chart of September 2000 corn before you read lesson 20. If you don't have access to such a September 2000 corn chart, click here (cornchart@brucegould.com) and I will see that one is sent to you, free of charge. Just type "free corn chart" in the subject line and provide your name and postal mailing address. 

              Bruce Gould

 

Always remember that stock, options, and futures trading may involve substantial risks and that past performance is no guarantee of future performance.