Entry Point
Chapter 2: Making Money on the Price Upside - Most Upside Entry Points Make Money

This chapter shows you how to compute the number of profitable and unprofitable buy and sell combinations for any price series. At buyupside.com we call this methodology the Complete Trading Model (CTM).

To get started consider a simple price series consisting of two parts: an upside and a downside. The upside is the group or prices that start with the lowest price (bottom) of the series and end with the maximum price (top) in the series. The downside starts with the next price after the maximum price and ends with the lowest price of the downside. This series of upside and downside prices is called a cycle. The following price chart shows a series of 10 hypothetical monthly closing prices. The upside has six prices and the downside has four prices.

Trade Types

An investor can buy or sell at any of the price points along the upside and downside. For purposes of this discussion one buy and sell is called a buy and sell combination, or trade for short. There are three types of trades: Buy on the upside and sell on the upside, buy on the upside and sell on the downside and buy on the downside and sell on the downside.

A buy upside and sell upside trade occurs when a purchase date occurs before the peak price and a sale date occurs on or before the peak price. So both the buy and sell occur on the upside of the price pattern. An upside buy can not occur on the date of the peak because CTM dos not allow a buy and sell on the same date. An upside price pattern with a few down prices has more winning trades than a pattern with many down prices The buy upside and sell upside trade type has the highest proportion of profitable trades of the three trade types

A buy on the upside and sell on the downside trade occurs when a purchase date occurs on or before the peak price and a sale date occurs after the peak price. A buy occurs on the upside as prices are rising and a sell occurs on the downside as prices are falling. The proportion of profitable buy upside and sell downside trades is usually less than the proportion of winning trades for the buy upside and sell upside trade type.

A buy on the downside and sell on the downside trade occurs when a purchase date is after the peak price and a sale date is after the peak price. So both the buy and sell occur on the downside of the price pattern. A downside price pattern with few rising prices has more losing trade than a downside pattern with more rising prices. Of the three trade types, the buy downside and sell downside trades have the fewest profitable trades.

The Trade Table

The following Trade Table shows the 10 hypothetical monthly prices and the
resulting 45 buy and sell combinations (trades). Note: The number of trades = ((Number of prices) x (Number of prices - 1))/2 = (10x9)/2 = 45.

For this set of prices we compute the percent return, (Sell price - Buy Price)/Buy Price, for each buy and sell combination (trade) and then classifies each trade as a winner (makes money) or a loser (breaks even of loses money).

Then each percent return is placed in the Trade Table, which is organized by buy and sell dates for each trade types.

Locate the Sell Date and Sell Price columns on the left side of the trade table. The next column to the right includes the gains and losses for the buy and sell combinations for the first buy price, which is $10.10 and occurs on Jan-02. The buy prices and dates are located in two rows at the bottom of the table.

For the first buy price, the first sell price is $12.50 on Feb-02. So the gain for the first buy and sell combination is 23.8 percent. The second sell price is $11.20 for a 10.9 percent gain. The third trade results in a 44.6 percent gain for the $14.60 sell price. The last trade for the first buy price occurs on Oct-02 at the $12 sell price. The gain is 18.8 percent. There are nine trades for the first buy price.

The second buy price is $12.50 and occurs on Feb-02. The first trade for this buy price occurs on Mar-02 at the $11.20 sell price for a 10.4 percent loss. The second trade occurs on Apr-02 at the $14.60 sell price for a 16.8 percent gain. The last trade for the $12.50 buy price occurs on Oct-02 at $12 for a 4.0 percent loss. There are eight trades for the second buy price.

The third buy price of $11.20 has seven trades and the fourth buy price of $14.60 has six trades.

The last buy and sell combination, which occurs on the Sep-02 buy date and the Oct-02 sell date, results in a 20% loss. There is no trade for the last price in the series on Oct-02 because a buy and sell transaction on the same date is not allowed.

Trade Type Summary

There were 45 trades for the 10-price series. The winning trades out numbered the losing trades 29 (64.4 percent) to 16 (35.6 percent). The average gain for all 45 trades was 12.1 percent. The largest one-trade gain was 67.3 percent. The largest one-trade loss was -29 percent. Note: The total number of trades = ((number of prices)*(number of prices-1))/2.

Buy Upside and Sell Upside Trades

There were six upside prices and 15 buy upside and sell upside trades. Thirteen trades (86.7 percent) were profitable and two (13.3 percent) lost money. So the percent winners are 86.7 percent. And the percent losers are 13.3 percent. The range of returns was a high of 67.3 percent to a low of -10.4 percent. The average gain was 23.7 percent. For any price upside most buy upside and sell upside trades made money.

Buy Upside and Sell Downside Trades

For the 24 buy upside and sell downside trades winners out numbered losers 15 (62.5 percent) to 9 (37.5 percent). The average gain was 11.2 percent. The maximum gain was 59.4 percent and the largest loss was -29 percent.

For any price series the proportion of profitable buy upside and sell downside trades depends on the pattern of the upside and downside. If the bottom of the downside is much lower than the starting price of the upside, most trades will lose money. But if the bottom of the downside is higher than the starting price of the upside, most trades will make money. And the relative duration of the upside and downside can affect the number of winning and losing buy upside and sell downside trades.

Buy Downside and Sell Downside Trades

For the six buy downside and sell downside trades five (83.3 percent) lost money. So the percent winners equal 16.7 percent and the percent losers equal 83.3 percent. The average return was a 13.3 percent loss. The largest gain was 4.5 percent and the largest loss was -22.1 percent. Most buy downside and sell downside trades lose money

Even this simple set of made-up prices shows that buying on the upside is more profitable than buying on the downside. The examples in the remainder of the book are based on the methodology presented here. So before you continue, make sure you have a thorough understanding of the percent return for a buy and sell combination and percent winners and losers. Most of the examples use daily closes as the price measure. But the buy and sell combination methodology works for any trading interval including minutes, hours, days, months, years, decades and beyond.

Most Upside Entry Points Make Money, Most Downside Ones Do Not

General Electric (GE) provides an excellent example of how most upside entry points make money and most downside ones do not. For the price upside from January 2, 1996 through August 28, 2003, 96.05 percent of the 692,076 buy upside and sell upside trades (daily close) made money. This means that over nine out of ten upside entry points resulted in profitable trades.

For the price downside from August 29, 2000 through January 13, 2003 only 9.97 percent of the 189,420 buy downside and sell downside trades were profitable. So only one in ten downside entry points resulted in profitable trades.

These winning percentages, which are typical of most upside and downside price patterns, make it easy to understand why you want to buy and sell on the upside and avoid the downside.

Bubble Stocks You Make Money on the Upside But Lose It All On the Downside

The price bubble of Sun Microsystems (SUNW) shows the profitability of the upside and the unprofitability of a relentless downside. For this example the price upside and the price downside each had 533 prices that produced 141,778 buy and sell combinations.

For the upside 134,045 (94.55 percent) buy and sell combinations made money. Investors who bought on the downside had little chance to make money as only 9,057 (6.39 percent) downside buy and sell combinations were profitable.

Cyclical Stocks Have Profitable Upsides and Unprofitable Downsides

From 1992 through 2004 Kulicke and Soffa (KLIC), a semiconductor equipment maker, has had five price cycles, each with a distinctive upside and downside. The price chart of daily closes from July 7, 1992 to October 15, 2004 shows the completed cycles 1 through 5.

The table of percent winners shows the percent winners for each trade type for each cycle. The buying and selling on the upside is almost always profitable and buying and selling on the downside is mostly unprofitable.

Book Cover Chart Shows Upside and Downside Results

The red and green chart on cover of this book represents the percentage returns of all possible buy and sell combinations (based on monthly closes) for Micron Technology (MU) from March 1995 through March 2005. Click on the chart to enlarge it.

The profitable trades are in green and the unprofitable ones are in red. Most of the green area represents buy and sell on the upside trades. The large red area represents the unprofitable buy and sell on the downside trades.

For the 7,260 possible buy and sell combinations for the entire period, 3,058 (42.12 percent ) made money and 4,202 (57.88 percent) did not. Click here for a complete explanation on how to read this chart.

Cover Contents Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6

Posted February 21, 2007.

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