Stock chart of FORD stock created by Vincent Banial using AmiBroker charting software

A family member had bought some FORD shares. He bases his buys on Fundamentals. I’m a visual person, so numbers don’t have as much meaning as does a picture or a stock chart.

Trading FORD using pivots is straight forward. Look for a bottom low. That occurred in FORD at the beginning of Aug 2012. Great you found a Low. How do you define a Pivot Low? Well the price does not go lower. Instead the price since reaching said Low, has moved higher. Great. Ok, now you count your money and sit and wait.

This is the hard part. You next wait as the price makes higher highs. Eventually the price will stop rising.  Make a note of the high prior to the price starting to fall back down. That will be the trigger point for your future buy. The price should keep going down, but not going lower than your Aug Pivot Low.

Eventually the price will stop falling as more buyers start to buy again. Now you have to pay attention. As the price keeps rising you have to keep an eye on the price actions. Finance.Google.com is great for anyone who does not have charting software.

In FORD’s case the buy trigger was $9.66. The price rose above that on Sept 06 and your Buy Stop was triggered. You became the proud owner of one million shares of FORD and  it only cost you $9.66 Million Dollars plus brokerage fees.

Immediately after your BUY, you have to set a Sell Stop Sell at Market order, just in case the price falls to your prior Pivot Low (Aug). Your Sell Stop would be at $8.74. If the price drops to or below that level, you are out. A Sell Stop forces you to dump when the price goes the wrong way. There is no one out there who can consistently predict where prices are headed. It’s a matter of Capital Preservation. You will be wrong, many many times. As long as you can limit your losses, then you will have enough funds remaining to continue placing bets at the Stock Market casinos.

Well the price kept on rising and formed a new Pivot Top in Mid Sept. By the beginning of Oct the price was falling and fast approaching your buy price. Now the sweat starts to pour as you worry big time? Nah, you have your Sell Stop to protect you.

Your Sell Stop was never reached, so the fluctuation was normal. By the end of Oct the price moved higher than the mid Sept Pivot High. Ding Ding Ding. Time to do some work. You now need to raise your Sell Stop. Every time that a prior Pivot High is surpassed (Broken Thru on the upside) you need to raise your Sell Stop. That action protects your potential Capital Gain, as the price moves ever higher. Your new Sell Stop will be $9.75. From this point on your trade is more or less sure at break even and maybe even gets you a Coffee at Starbucks or Tims.

At the beginning of Nov a new Pivot High is formed and the price retreats back down. Make a note of the new Pivot High.

By the middle of Nov the price stopped falling. Note that the price did not come near your Sell Stop. That’s good news.

Now you wait for that prior Pivot High to be surpassed. That happened at the end of Nov and the beginning of Dec. Ding Ding Ding. Time to raise your Sell Stop again. Because the rise above the Pivot high only occurred for one day, you could also wait. Your call. If you moved your Sell Stop at the beginning of Dec, it was changed to $10.38. If you had waited for at least two days above your prior Pivot High, then you would have waited till the beginning Jan to raise your Sell Stop. Your Sell Stop would be $10.38 in either case.

In Jan 2013 the price of Ford stock went way high, over $14 per share. Yahoo for you. A new Pivot high was made at the beginning of Jan. The price fell back a bit and then went above that prior Pivot High. Ding Ding Ding. Time to raise the Sell Stop to $13.20.

Checking the stock chart, you can also see a nice Elliott Wave type three major price rises. Once you form the third rise (wave), EW Theory states that it’s probably a good idea to take your money off the table and sell. You could have pulled out of the trade once the price retraced back below $14. Or you could wait, just in case it had more steam to go even higher, Your sell stop at $13.20 would protect your capital Gains.

Well today, Jan 29 2013, the price hit your sell stop and you were out @ $13.20.

Now $13.20 minus your buy cost of $9.66, means your Capital gain will be $3.54 per share. Since you owned one million shares, then your Capital Gain would be $3.54 Million Dollars (minus whatever your Brokerage Fees were).

Now the battle starts with the tax folks to prove that you were Investing and not Trading. By not buying and selling along the way, you could argue that this was a sound investment. That means that 50% of your capital Gain will be Tax Free. You did buy in 2012 and waited till 2013 to sell. You can easily argue that you were not day trading. Depending on what else you have been doing at the Financial Markets Casinos, you may very well qualify as an Investor.

So there you have it. You made over $3.5 Million Dollars. Congrats!!

The fun part of this is that you did not use Fundamental Analysis. You also did not use Technical Analysis. There are no indicators on the chart. Not even a Trading Volume plot was needed. It was all based on the Price action.

Did you Buy at the Bottom? No. Did you Sell at the Top? Nope!!!

I am of the opinion that it is impossible to always buy at the Bottom Low and then sell at the Top High price. Chasing Tops and Bottoms is a fools game. The odds seem better when going after a piece of the center action. Your mileage of course may differ.

 

Disclaimer: The above is not meant as Financial or Investment advice. I am not a registered Financial or Investment advisor. Do your own Due Diligence. Always seek out the advice from your own Financial and Investment Professionals before placing any bets at the Financial Markets casinos called the Stock Market. You can lose money, possibly all of it, when buying and selling or trading stocks. The above is not a recommendation to buy or sell FORD or any other stock. The above post is for Entertainment purposes only.

Copyright © 2013 Vincent Banial All Rights Reserved