How I Buy Shares Cheaply
How do you buy a stock cheaply? How do you get in at a low price before it gets expensive? Many people like to buy when as soon as the price falls. They’ll wait for a stock to drop by 10 or 20 or 30% and then rush in to buy. But doing this could be a big mistake.
In this video, I’m going to tell you the two key strategies I use for buying a stock. I use these strategies to identify when conditions are in my favour, and I’ll show you how they help me avoid stocks that have further to fall.
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You know, everyone loves a bargain… it could be a half yearly clearance or a humble garage sale… a big discount is hard to resist. The prospect of nabbing a bargain is irresistible. People want to buy as soon as the price drops. But should you approach stocks the same way?
You’ll be familiar with words “buy low, sell high”. It’s probably the most famous stock market saying of all time. Few other phrases have as much cut through. The tricky part is defining what’s “low” and what’s “high”.
Many believe that buying low means to buy straight after a big fall. They say this is how you get a bargain. Their overriding aim is to lock in a discount before prices rise. Others are a little more patient… Rather than pre-empt the low point, these people wait for early signs of strength. Often it only takes a one or two day rally to get their interest. They’ll then buy at the first opportunity.
But rushing in can be risky. You see, stocks in a downtrend also experience periods of rising prices. And sometimes, these rallies can be very strong. Many people mistake these for the start of a new uptrend.
But often it’s a trap. You see, a stock doesn’t just fall in a straight line. A declining market will usually include a series of strong rallies. These periodic uplifts often provide a false sense of hope before prices once again turns lower.
Now this is true for both individual stocks, and the market as a whole. While every investor wants to buy a bargain, they need to be careful not to buy a bargain that quickly gets even cheaper.
Here’s what I mean:
This is the All Ordinaries during the global financial crisis. It shows the market at both its peak and the eventual low. I’ve marked some of the key rises and falls within the decline.
Now, have a look at the rallies… up 16%, up 18%, up 9%, up 10%, up 16%, up 17%. Any of these could have been the real thing. But they weren’t. And that’s what makes these periods so hard. While a bear market rally may look and feel like the real thing, it’s not. The market eventually gives back all the gains. And that’s why rushing in at the first sign of strength is risky.
So how do put the odds in your favour? How do you avoid a bad case of buyers regret?
Well, I’ll tell you what I do. I use two primary indicators for identifying when to buy. These don’t get me in at the low, but they do the next best thing… they help me get in at a low price, and when the odds of further gains are on myside.
So what are those indicators? Well, they are the:
1. 50 and 100-day moving averages
2. 70-day price high
The aim is to identify when a stock is in a sustainable rising trend. If either of these indicators are negative, I won’t buy. And that’s because the risk of buying into a bear market rally is too high. Yes, I want to make money. But it’s even more important to protect capital. When the odds aren’t on my side, I stay on the sidelines.
Now, I won’t go into detail about the mechanics of the strategies today. The point is to make you aware of them, and get you thinking about when you should consider buying. But I will say this… I use indicators that react slowly to price changes. And this is the key to avoiding bear market rallies. A few sessions of rising or falling prices have only a small impact.
Let me give you an example:
The graph shows two hypothetical trades in Commonwealth Bank. It covers a similar period to the previous chart of the All Ordinaries during the GFC. Now, you’ll see a label for Trade 1. This is an exit from an earlier trade. CBA hits its trailing exit point after the market turns lower. The exit protects capital from further share price falls.
Now, have a look at the moving averages at the top of the shaded area… they cross and turn lower. This means there can’t be any buy signals.
Do you remember all those bear market rallies on the previous chart? You know the ones: up 16%, up 18%, up 17% and so on. They all occurred during the shaded area on the graph. If you were using my moving average and 70-day high approach for entries, you wouldn’t have been a buyer during this period.
Have a look at all CBA’s rallies throughout the decline… there were many buyers at each surge higher. Some were likely thinking that a major low was in place, and that CBA was a bargain. And for a few days or weeks, prices rose.
But the ultimate result was a new low. And that’s the risk of buying early.
This brings us to the key part of story: How to do you buy CBA cheaply, and in doing so, lower the risk of buying a bargain that quickly gets cheaper?
As I said before, I have two key entry requirements:
1. The moving averages must be positive
2. Stock needs to be at a 70-day high
This approach will never catch the low — it’s not possible. But what it can do is help you avoid many of the false starts.
Here’s another chart for CBA:
This time I’ve highlighted the entry. You can see the final low on the chart. The rally initially looks like another bear market advance. Prices push higher and then begin to roll over again. It’s a pattern that’s been playing out for months.
But this time is different… rather than making a new low, the shares rally. This starts to feed through to the moving averages. They begin to turn upwards, indicating a potential trend change. With the shares then hitting a 70-day high, I get a signal to buy.
Some people will say this approach gets in late. They’ll point out that CBA was well off its lows when the entry signal occurs. They’ll add that getting in sooner is more profitable.
But these people miss the point. It’s not about picking the absolute low… you see, successful investors are also good risk managers. They understand that trying to buy at the lowest price is risky. Instead, they’ll happily give up some upside in exchange for a more favourable setup.
If you’d like to learn more about my strategies, I’m about to host a free skills accelerator course. I’ll be teaching 5 key tactics for identifying, managing, and exiting high potential stocks. You’ll find all the details at my website: motiontrader.com.au.
As always, if you enjoyed this video and thought it was valuable, then please click the like button and share it with your friends. And be sure to subscribe to my channel and click the bell icon for notifications. Thanks for watch, I’m Jason McIntosh, and let’s find some trends this week.
I'm Jason McIntosh, the creator of Motion Trader. My career began in 1991 on the trading floor at Bankers Trust. Nowadays, I trade my own systems from home in Sydney.
Motion Trader is for investors who value robust analysis, data driven entry and exit signals, commentary, and education. I use engineered algorithms to identify when to buy and sell ASX stocks. No biases or guesswork, just data driven signals.