4 Reasons Why You Must STOP Using a Buy Below Price and a Target Selling Price

There are many long-term stock investors, especially the early ones, who do peso cost-averaging.

Peso cost-averaging is the habit of buying shares of stocks for a defined amount of money within a set schedule.

It can be buying P5,000.00 worth of shares of a stock every month or quarter.

There’s no universal amount and frequency.

The amount can be higher or lower than P5,000.00.

The frequency can be weekly, monthly, quarterly, or annually.

Base it on what you can afford.

Peso cost-averaging intends to help you form a discipline in stock investing.

That’s why there’s a predefined amount of money and schedule in topping up.

There are stock market consultancy services in the Philippines that use the peso cost-averaging model, and they all have a common denominator.

What’s their common denominator?

It’s their usage of a Buy Below Price and Target Selling Price on their guide.

What Is a Buy Below Price?

The principle of a Buy Below Price tells you that it’s okay to buy more shares of a stock if its last price is lower than the value of the Buy Below Price and if there’s a recommendation to buy.

The stock market mentors who use this model make their customers believe that the stock is too cheap to ignore when its prevailing price is lower than the indicated Buy Below Price.

The usual justification is, “It’s a fundamentally-sound company, anyway. Why not buy more shares while the price declines?”

This is where the concept of using a Buy Below Price can do you more harm than good.

What Makes a Buy Below Price a Bad Idea?

While you may already know that I am a full-pledged technical analyst, I don’t say that fundamental analysis is a bad idea.

If fundamental analysis makes you a profitable investor according to your past results and not just based on the raw, fresh, and untested theories taught by your mentor, then, continue doing fundamental analysis.

But if your conviction is only based on what you have newly-heard from your mentor and not on actual application and experience, you must read this post from the very first letter to the very last punctuation mark.

On the other hand, I ask you to think about this: Why will you buy the dips if the downward pull is still strong and shows no signs of stopping? Isn’t it more logical to check for signs of reversals before you buy the dips?

1. A Buy Below Price Makes You Buy When You Should Not

Did I make you think seriously when I asked the two questions above?

I know you’re smart enough to know that a Buy Below Price makes little to no help at all.

But I understand why most of you who use a Buy Below Price still choose to continue using it even if you already know it doesn’t make sense.

Maybe, just maybe, it’s the first and only “theology of investing” that was preached in front of you.

Maybe, just maybe, you’re a raving fan of your popular mentor with hundreds of thousands or millions of followers on social media that’s why your brain leads you to think that it’s “safe” to follow whatever he or she writes or speaks about.

Amen?

I’ll give you a few examples of why a Buy Below Price system doesn’t make sense at all.

Let’s say your mentor recommends the stocks below.

Stock: Ayala Corporation (PSE:AC)
Recommendation: Continue Buying
Buy Below Price: P956.52

My Recommendation: You SHOULD NOT buy AC as of the time indicated on the chart below because the downtrend is still more than likely to continue.
Reasons: My 10SMACD combo and Momentum Power Indicator are both bearish.

Look at the dominant range on my Trade-Volume Distribution chart. It’s closer to the intraday low than the intraday high.

Last Price: 857
VWAP: 863.361835
Most Traded: 858 – 857.5
Most Voluminous: 858 – 857.5

AC - Trade Volume Distribution 1 - 10.25.2019

Let’s say you don’t know me yet and you haven’t read what I’ve mentioned above yet.

So, you bought AC at P857.00 because it’s the cheapest price under the ASK column and your mentor gave you a buy recommendation and the current price is lower than the Buy Below Price.

What will you think and feel if AC touches P850.00 by the next trading day?

Wouldn’t you snap your fingers and say, “I should have not bought or topped up. I should have waited some more. Now I don’t have buying power anymore to buy the dips at P850.00.”

What if the downtrend is still more than likely to continue even when the price has already gone down to P850.00 per share?

If I’m making sense to you, touch the person to your left and say, “Amen!”

Now, face the person to your right and say, “What on earth have we been following all these years?”

Oh, I’m not yet finished. I’ll give you more examples so you won’t think that I’m only cherry-picking stocks that perfectly served my point.

Stock: China Banking Corporation(PSE:CHIB)
Recommendation: Continue Buying
Buy Below Price: P29.20

My Recommendation: Don’t buy CHIB yet as of the time indicated on the chart below. There is no confirmed buy signal. The downtrend is still more than likely to continue.
Reasons: My 10SMACD combo and Momentum Power Indicator are both bearish.

Last Price: 25
VWAP: 25.040722
Most Traded: 25 – 25
Most Voluminous: 25 – 25

CHIB - Trade Volume Distribution 1 - 10.25.2019

CHIB is more than likely to re-test the support at P24.80.

Given that data-driven assessment and probability, would you buy CHIB at P25.00 or wait some more?

Of course, you would buy some more because your mentor is your idol and he or she gave you a “Continue Buying” recommendation for CHIB.

No?

Why not?

Because you can now see the logic of what I’ve been talking about?

If your answer is affirmative, pinch the person to your left and say, “I don’t know whether I should laugh or cry with this Buy Below Price.”

You want another sample? I’ll give you one more.

Stock: Metropolitan Bank and Trust Company(PSE:MBT)
Recommendation: Continue Buying
Buy Below Price: P83.33

My Recommendation: Don’t buy MBT yet as of the time indicated on the chart below. There is no confirmed buy signal. The downtrend is still more than likely to continue.
Reasons: While the 10SMACD combo is bullish, the Momentum Power Indicator is bearish.

Don’t you see that the last price is lower than the VWAP? Don’t you see that the dominant range is still closer to the intraday low than the intraday high?

This means the majority of the investors lack confidence to buy MBT at a price closer to the intraday high. They’re still eavesdropping with each other.

If these deep-pocketed investors, are not that confident to buy at a higher price yet, despite the hundreds of millions or billions in their pockets, why should we (retail investors with only a few thousands in our pockets) hurry?

Remember, let’s remind ourselves that individual retail investor’s sheer optimism has little to no power to move the price toward the northward direction by a significant degree.

Last Price: 71.8
VWAP: 72.229018
Most Traded: 71.8 – 72.2
Most Voluminous: 71.8 – 72.2

MBT - Trade Volume Distribution 1 - 10.25.2019Let me show you a bigger proof that a Buy Below Price can do you more harm than good.

What was the time when I presented to you the latest Trade-Volume Distribution chart of AC?
Answer: 12PM Manila Time

What was the last price during that time?
Answer: P857.00

What’s the prevailing price of AC as of 3:30PM Manila time?
Answer: P849.00

What was the time when I presented to you the latest Trade-Volume Distribution chart of CHIB?
Answer: 12PM Manila Time

What was the last price during that time?
Answer: P25.00

What’s the prevailing price of CHIB as of 3:30PM Manila time?
Answer: 25.00

What was the time when I presented to you the latest Trade-Volume Distribution chart of MBT?
Answer: 12PM Manila Time

What was the last price during that time?
Answer: P71.80

What’s the prevailing price of CHIB as of 3:30PM Manila time?
Answer: P71.65

Let me ask you. Which one between my method and your Buy Below Price can truly and scientifically help you buy more for less?

Do you now know that there’s a strategy or method that is way better than your Buy Below Price?

How’s your blood pressure so far?

Continue reading if you can still bear the pain of these tough realizations. Otherwise, see your doctor immediately.

2. A Buy Below Price Doesn’t Help You Find the Best Price Range Where You Should Buy

I know, I know, while you were reading my recent sentences above, a thought was running in your mind, “This is cool! Not only does Jaycee’s strategy tell you when there’s a confirmed buy signal, but it also shows you the best price range where to buy.”

That, my friend, is something your Buy Below Price can never ever do.

By the way, you will not see the dominant range (favorite prices of investors) even on intraday charts.

You don’t believe me?

Open your stock’s 1-minute chart.

Can’t find the dominant range there?

Pull up the 5-minute chart.

Nothing?

How about the 10-minute chart?

None?

Open the 15-minute, 30-minute, and 60-minute charts.

Still none?

I told you.

In lesson # 5 of my Evergreen Strategy in Trading and Investing in the Philippine Stock Market Video-On-Demand (VOD), I discussed how to find the best price range to trade and the rationale (why) behind it.

I know you don’t need more supercalifragilisticexpialidocious explanations on why your Buy Below Price pushes you to buy when you shouldn’t and why it doesn’t help you find the best price range where you should buy.

I’ve shown you charts. I’ve given you numbers. Everything’s time-stamped.

If I still don’t make sense to you, no one will.

I will tell you all of the flaws of a Buy Below Price when I publish the most controversial book about the stock market in the Philippines soon.

For now, these two flaws I’ve mentioned above should be more than enough for you to know the information that has been deliberately hidden from you for a long time.

Now, let’s talk about the flaws of a Target Selling Price.

What Is a Target Selling Price?

If you’re a long-term investor who follow the peso cost-averaging method, you surely have the Target Selling Price column in the guide issued by your mentor.

Some stock brokers also have this Target Selling Price column in their investment guides for their clients. Some brokers use the Fair Value of a stock as their Target Selling Price.

What do you think is the reason why some equity investment advisors or mentors promote the use of a predefined Target Selling Price?

There’s no universal answer to that question, but I asked some of my seminar attendees why they’re using a Target Selling Price.

They have a common answer: a Target Selling Price prevents the stock investor from chasing the stock all the way to the top.

Some say the Buy Below Price has that goal, too. That’s why a Buy Below Price is always lower than the Target Selling Price.

I agree that it is our responsibility to educate new stock investors about the dangers of chasing the stock’s price all the way to the top.

I agree that it is our mission to help you tame your emotions.

I, myself, educate you through our subscription service and the Evergreen Strategy in Trading and Investing in the Philippine Stock Market Video-On-Demand (VOD) on WHY you should not chase the stock all the way to the top, WHEN you should stop chasing the price, and HOW you should tame their emotions once you already know the WHY and the WHEN.

I am in favor of the objective behind the use of a Target Selling Price but NOT on the Target Selling Price per se.

I’ll give you two reasons why you must stop using a Target Selling Price.

3. A Target Selling Price Will Make You Sell Too Early

Let’s say your mentor’s Target Selling Price for Ayala Corporation (PSE:AC) is P1,101.00.

Let’s say AC has gone up today and it hits P1,101.00.

Would you sell?

Most likely, you would sell because that’s what your teacher told you.

Now, ask me, “How about you? Would you sell?”

I am not going to answer your close-ended question with a straight yes or no.

I need to check first if the uptrend is still more than likely to continue.

There’s a way to have a data-driven projection. Why shouldn’t I check first if there’s a method for that, right?

If my 10SMACD combo and the Momentum Power Indicator are both bullish, it’s a data-driven signal that the ascent of the price is still more than likely to continue.

That bullish conviction is all the more convincing when the ratings of the True Market Sentiment for the day (prevailing or as of closing), week-to-date, and month-to-date are bullish.

I know that the 10SMACD combo, Momentum Power Indicator, and True Market Sentiment are not familiar to you and are not Google-able because I am the developer of these methods.

You’ll know more about my methods in the Evergreen Strategy in Trading and Investing in the Philippine Stock Market Video-On-Demand (VOD).

Nonetheless, the familiarity with my proprietary methods is not the point but the availability of a method to check if the stock is still strong enough to continue moving upward.

If you know that there’s a way to know that, why would you blindly sell your shares without challenging your Target Selling Price?

You are a rational being. You are a thinking investor. You should. You must. You are.

Many of my clients, who came from another stock market mentor who uses an averaging method, uniformly told me, “Sir, noong sinabi nilang mag-sell na, tumaas pa ng 10% ang stock from the Target Selling Price. Sana di muna ako nag-sell.”

Translation: “Sir, when they advised us to sell, the price went up by 10% from the Target Selling Price. I should have not sold.”

I know hindsight is perfect. Hindsight also reflects a certain level of greed.

But there’s a point to be regretful for selling too early just because the Target Selling Price got hit.

There’s a better way to tame the investor’s greed than using a predefined Target Selling Price.

Use a Trailing Stop Instead of a Target Selling Price

I always tell my clients that a trailing stop does three (3) letter Ps.

It PRESERVES your capital.

It PROTECTS your gains (if any).

It PREVENTS unbearable losses.

I talked about the trailing stop in great detail in lesson # 6 (How to Sell More Logically and Less Emotionally) of my Evergreen Strategy in Trading in Trading and Investing in the Philippine Stock Market Video-On-Demand (VOD).

Just in passing, I’ll give you bits of information about it.

The moment you enter a new position in a stock, you must calculate your trailing stop.

Here’s the formula.

Trailing Stop = Entry Price x Percentage of Risk You Can Handle

I’ll give you a sample computation.

Let’s say you entered a new position on Ayala Corporation (PSE:AC) at ₱840.00 per share.

Let’s say your tolerable risk is 5 percent.

Initial Trailing Stop = ₱840.00 x 5% = ₱798.00

This means that even if the price of AC goes down from your entry price, your blood pressure is still normal as long as the price doesn’t go lower than ₱798.00. You’re getting my point?

Because of this, the first and third Ps of a trailing stop are fulfilled: A trailing stop PRESERVES your capital and PREVENTS unbearable losses.

There’s more!

There’s only one kind of an adjustment that you can do with a trailing stop. It’s an UPWARD adjustment only.

You do an upward adjustment every time the prevailing price registers a higher price.

Regardless of the amount, as long as the price goes up, you do an upward adjustment on your trailing stop.

Here’s the formula: Prevailing Trailing Stop = Current Price x Percentage of Risk You Can Handle

Let’s say AC went up from ₱840.00 to ₱900.00.

Here’s your new trailing stop then.

Prevailing Trailing Stop = ₱900.00 x 5% = ₱P855.00

Now, the second P of the trailing stop is fulfilled: It PROTECTS your gains (if any).

Because your gains (when there’s one) are locked, the “pera na, naging bato pa” phenomenon will never happen.

Remember, there’s only one adjustment in a trailing stop, and that’s an UPWARD adjustment only.

You do not do a downward adjustment on your trailing stop when the prevailing price goes down.

Now, let’s go back to the other mentor’s predefined Target Selling Price for AC.

It’s ₱1,101.00.

Let’s say AC touches ₱1,101.00 right now.

Would you sell?

Of course, you won’t.

Why?

Well, I taught you the concept of a Trailing Stop that’s better than the other mentor’s Target Selling Price.

Assuming the 10SMACD and Momentum Power Indicator of AC remain bullish when AC touches ₱1,101.00, you’ll do this computation.

Prevailing Trailing Stop = Current Price x Percentage of Risk You Can Handle

PTS = ₱1,101.00 x 5% = ₱1,045.95

If and when AC continues to go higher than P1,101.00, you’ll just keep on following the formula I gave so you can take advantage of the ascent in price in a STRESS-FREE manner.

Why stress-free?

Because your gains are secured already. You don’t do a downward but upward adjustment only. Your tendency to be greedy is well-tamed.

There’s more to this concept of a trailing stop but I’ll be unfair to those who paid for their access to the Evergreen Strategy in Trading and Investing in the Philippine Stock Market (Video-On-Demand) if I’ll teach everything here for free.

But with the amount of information I’ve given you for FREE, so far, would you still complain?

I’ve discussed three points only but I feel I’ve written an e-book already.

Well, if the value that this brings you is helpful, I’m glad that I got carried away and have emphasized my points at this level.

Now, punch the person to your left in the ribs until you break his or her bones and….

No, don’t do that. I’m only kidding.

Gently ask the person to your left, “Which do you think is better? The other mentor’s Target Selling Price or Jaycee De Guzman’s Trailing Stop?”

Then, tell the person to your right, “Are you guilt-tripping me?”

4. A Target Selling Price Will Make You Sell Too Late

Let’s say your mentor’s Target Selling Price for Ayala Corporation (PSE:AC) is ₱1,101.00.

Let’s say the price started to go down when it reached ₱950.00.

Because it’s still below your mentor’s Buy Below Price of ₱956.52, it’s more than likely that you would not sell.

In fact, your mentor might say, “This is a blessing! Buy more for less.”

Then, your mentor posts a picture of Warren Buffett with a quote and a bonus prayer.

What if the price went down to ₱900.00?

Is that still a blessing?

If the downtrend in price is more than likely to continue because the majority of the investors are already locking-in their profits, that’s not a blessing for you to buy more for less but a signal telling you that you might want to reduce your percentage of risk already.

When the 10SMACD and Momentum Power Indicator are both bearish, especially when the True Market Sentiment is also bearish, it means the bulls may have run out of gas to continue trekking the northward direction.

Don’t contradict the market unless you have at least ₱1 billion to push the trend to the direction where you want it to go.

I’ll show you why a trailing stop will prevent you from selling too late.

What’s our formula? It’s the same.

Prevailing Trailing Stop = Current Price x Percentage of Risk You Can Handle

In my previous examples, we used a 5% risk percentage.

Once the 10SMACD and Momentum Power Indicator are both bearish, you may want to reduce your percentage of risk.

Assuming both indicators are bearish, you may want to reduce your percentage of risk from 5% to 3%.

Prevailing Trailing Stop = P950.00 x 3% = P921.50

Because of this method, you won’t just watch and do nothing as the price drops from P950.00 to P900.00.

Do you get what I’m saying?

Your other mentor who doesn’t know this may only realize that there’s not much upside on AC once it hits P900.00 or lower.

That’s not the right way to help clients preserve capital, protect gains, and prevent unbearable losses.

Conclusion

Just for once, learn how to challenge the status quo. Not because peso cost-averaging has been done this way for decades, it doesn’t mean you’ll just embrace it without checking if it’s your best option. Not because you’re a busy person, it doesn’t mean you’ll just settle in this kind of practice in long-term investing.

If you think my methods in short-term trading and long-term investing demand a lot of time, well, ask my clients how many minutes do they only spend to make sure that they can do better than those who buy mutual funds or an index fund. How do you ask them? Post on stock market related Facebook Groups and ask for feedback from those who have tried our services already. You may also read these hundreds of testimonials that some of our clients submitted on our website.

We have two services that can help you become a better trader and investor.

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Which of the pieces of information I’ve shared with you do you consider as the best takeaway?

What did you realize after reading this?

How would you like to change your strategy now?

Let’s chat in the comments section. I’ll personally respond.

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