How to Double Your Money without High Risk

Everyone loves a bargain. It’s a excellent feeling to lock in a big discount.

We naturally link affordable prices with opportunity. That’s how we’re wired. And in many situations this works.

The Punching Day sales are a classic. Long lines snake about street corners. The prospect of obtaining a deal is irresistible. Individuals want to buy as soon as the price falls.

But should we approach stocks the same way?

Possibly the most famous stock market maxim is actually ‘buy low, sell high‘. The saying is all about as old as the marketplace itself.

This is largely a statement from the obvious. That’s how you earn profits — buying low and promoting higher. There’s nothing profound in that.

But here’s the catch. How do you determine buying low?

The mistake in buying low

You see, many people believe buying low means purchasing when prices are falling. This strategy typically works well for consumer goods. But how does it fare in the stock market?

Well I’ve done some back-testing to discover. I’ll tell you about this in a moment. But first I want to recap last week’s report.

You’ll remember the discussion involved buying strong stocks. This was in response to a member’s concern that Quant Trader signals some stocks from record highs. His thinking was that buying after a big move is extremely risky.

As you realize, I ran a back-test to obtain some data on this. The test had two new rules for buy signals:

1. A stock must be at a three 12 months high (or greater)
2. It should be at least 300% above its 3 year low

Here’s the chart you saw last week.

It turns out this was a successful strategy. You could do instead well just buying shares at three year levels.

This isn’t any great surprise. Buying stocks at multi-year highs is trading with the trend. And the odds favour a pattern will keep going.

Last week, We said I’d show you some examples. Let’s do that now.

Stocks that double, and keep going…

These three stocks are from the back-test which produced the above graph. This is why it’s a mistake to avoid stocks simply because they are strong.

The first stock is Aurora Oil & Gas [ASX:AUT]. It ceased trading last year following a takeover.

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The system’s buy sign was at $0.95 on 9 August 2010. The shares were 850% off their 2009 low. AUT had also just hit an eight year higher.

Just think for a moment. Would you think about buying?

Let’s see what happens next.

Strength led to more strength. The system captured a 169% gain next 12 months.

The next example is a financial services company — Credit Corp [ASX:CCP].

Here’s the actual chart.

CCP was at an all-time higher when this buy signal had been identified in late 2004. The actual shares were also 720% above their 2000 low.

Buying at this stage runs counter to the better judgment of many. But the data suggests this shouldn’t be the situation.

Let’s check out what happened.

This stock had a lot further to go. The positioning made a hypothetical 245% in less than three years.

Last but not least is Greencross Veterinarians [ASX:GXL].

This is the chart.

The buy sign was at $2.43 in August 2012. The shares were just hitting an all-time higher. This was also 305% above the stock’s reduced two years earlier.

The result tells a familiar story. Here’s the ultimate chart in the series.

This trade ran for just under 2 yrs. The end result was a 220% gain. Pretty good for buying at a record higher.

There is no doubt about it — buying into strength can lead to big gains. You’re more likely to dual your money when trading with the trend. The path of least resistance is up.

It’s important to note that this won’t always happen. There’ll be other times when the stock becomes lower the next day. That’s why there exists a stop loss. It limits the risk.

Okay, so this brings us to my opening question.

Should all of us buy stocks that are slipping in value?

I found a fascinating article while researching for this update. It was published by a popular local investment advisory last November. The crux of the story was that stocks buying and selling near a one year reduced are potential bargains.

Yes, they may be. The wreckage of the past can lead to excellent opportunities. But I would want to see signs of an upward trend before buying. That’s the Quant Trader way.

The writer didn’t seem too fussed by this fine detail. He identified three slipping stars as potential buys: Crown Resorts [ASX:CWN], Woolworths [ASX:WOW], and The Reject Shop [ASX:TRS].

Guess what. All three are lower today — despite the All Ordinaries buying and selling higher.

Buying at a one year reduced seems more of a snare than a bargain. But this is simply a small sample. We’re going to need a bigger test.

So let’s reverse the strategy you saw earlier. This time I’m going to set the actual algorithms to only buy stocks at a three year reduced (or lower).

Here’s what happens.

This shows the hypothetical profit from the process. The date range is One January 2000 to 24 April 2015. It assumes placing $1,000 on every purchase signal.

The outcome is clear. This tactic is a total failure…it’s got nothing to show after Fifteen years.

Buying as prices tumble below three year lows is no bargain. Back-testing indicates it’s much better to jump on board an established trend.

As they say, the trend is your friend!

Until next week,

Jason McIntosh,

Editor, Quant Trader

Editor’s note: It’s now eight months since Quant Trader began giving live signals. And I can say this — the strategy of buying into strength is working BIG time. There are now 12 trades displaying a profit of more than 70%. The largest gain is 164%. Find out how YOU can industry this way here.