Generally, I like to use a series of indicators to evaluate the risk-reward potential of various stocks as well as inform and guide actions that I take in the stock market in a disciplined fashion. Two of these I discussed in a previous article, Using Bollinger Bands, Stochastics, and Other Indicators to Guide Stock Market Activities. This article discusses the Relative Strength Index (RSI) and ways to manage risk via price averaging. A couple of days ago, in the stock market, I decided to sell additional shares of my Unisys (UIS) stock based on the RSI and other indicators and financial data that I generally look at while using dollar cost averaging to manage risk.
I initially bought the UIS stock a few months ago, because the risk-reward indicators and financial data that I generally look at appeared to be highly favorable at that time. Since then, the stock had both declined significantly and increased significantly at various points in time. When the stock declined significantly, I performed a risk-reward assessment based on the indicators, charts, and financial data that I frequently look at and determined that the pricing of the stock was highly favorable. I then started aggressively buying as a result. When the stock began to rise I continued performing risk-reward assessments and when the pricing of the stock began to approach less favorable conditions I started selling shares. One of the indicators that I sometimes look at when making these determinations is the RSI as depicted on the following chart.
UIS Candlestick and RSI Chart courtesy of StockCharts.com
When the RSI line rises above the 70 level and then hooks down then that is the textbook definition of a sell signal. When the RSI line falls below the 30 level and then hooks upwards then that is the textbook definition of a buy signal. In my experience, I’ve found that doing some buying and selling as the RSI line approaches those two extremes has resulted in consistent gains over time. I don’t usually like to wait until the textbook definition is met before starting to buy and sell as it will most likely take a long time for these conditions to be met. I just execute my “buy” and “sell” activities in accordance with the risk profile associated with the investment goal I am trying to reach. If the investment goal I am trying to reach is in a high risk category then I will most likely wait at least until the textbook definition is met for the RSI before selling shares and not wait for the textbook definition to be met for the RSI when buying shares. If the investment goal I am trying to reach is in a low risk category then I will most likely do the opposite; only buying shares when the textbook definition is met for the RSI and selling shares prior to the textbook definition to be met on the sell side.
As I discussed in a previous article, Using Bollinger Bands, Stochastics, and Other Indicators to Guide Stock Market Activities, other potential reasons for selling shares of the UIS stock still held true in that the UIS stock had not only “reverted to the mean” but had risen above both the 20 day and 50 day Exponential Moving Averages (EMA). I discuss moving averages in further detail in my article, Using Moving Averages and Price Averaging to Realize Consistent Gains in the Stock Market. In addition to the EMA aspects, the UIS stock had continued “filling in the gap” between the 23 July gap down in the stock price and the previous day’s closing stock price.
Each of these were indications that the UIS stock might have been getting a little pricey and that it might have made sense to sell some shares to manage risk and have cash available to take advantage of future investment opportunities that became available. The UIS stock has had a pretty good run since the 23 July drop, gaining nearly 20%, so it made sense to sell some shares and await the next favorable investment opportunity to put those dollars to work.
Price averaging is a technique that I frequently use to manage risk and to realize consistent gains in the stock market. I like to price average into stocks when buying them and to price average out of stocks when selling them. It is nearly impossible to get the absolute best price when buying and selling stocks, but via price averaging you will often get a good price. I generally use this price averaging process over multiple time frames. For example, when my risk reward assessment of a stock becomes highly favorable, via the indicators and financial data that I generally look at, and I plan to begin purchasing shares of the stock then I will usually monitor the stock price during the day and try to buy about half of the stock when the price approaches the low of the mid-morning part of the day and then buy the remaining half towards the end of the day; resulting in a price that is the average between these two prices. This ensures that at least I did not buy the stock at the highest point during the day and that I purchased the shares for a somewhat reasonable price. Following these initial purchases, I generally monitor the price of the shares throughout the days and weeks that follow and anytime the stock falls significantly from my currently averaged price point, and my risk-reward assessment for the stock remains favorable, I buy additional shares which essentially brings down the average price that I paid for the shares overall.
In a similar fashion, I price average out of stocks when selling shares. For example, when my risk reward assessment of a stock becomes unfavorable in nature, via the indicators and financial data that I generally look at, and I decide that I want to begin selling shares of the stock then I will usually monitor the stock price during the day and try to sell about half of the stock when the price approaches the high of the mid-morning part of the day and then sell the remaining half towards the end of the day; again resulting in a price that is the average between these two prices. This ensures that at least I did not sell the stock at the lowest point of the day and that I sold the shares for a somewhat reasonable price. Following the initial sales of my shares, I then generally monitor the price of the shares throughout the days and weeks that follow and anytime the stock rises significantly from my currently averaged price point, and my risk-reward assessment for the stock remains unfavorable, I sell additional shares which brings up the average price that I sold the shares for overall.
Price averaging is a wonderful way in which to manage risk and to realize consistent gains over time. So I encourage you to use this price averaging process when performing your investment activities. Again, it is extremely difficult to get the “best” price, but not so difficult to get a “good” price. Price averaging can help to ensure that you always get a decent price both when buying and selling shares. I have even successfully used this price averaging process to transform large initial losses into eventual gains. For example, I once experienced a 33% loss on a bad call I made on HG Gregg (HGG), but I kept buying the stock on the way down which eventually resulted in an overall gain of 5%.
So… That’s where things stand for me in the stock market right now. I’ll let you know how things go. Either way I have a plan. If the UIS stock rises significantly, or the risk-reward becomes substantially more unfavorable in nature via the indicators and financial data that I look at, then I’ll be a seller of additional shares, but if the UIS stock falls significantly, and the risk-reward becomes favorable in nature via these indicators and data, then I’ll be a buyer.
This article informs how to evaluate the risk-reward potential of various investment alternatives and how to manage risk and realize consistent gains in your investments over time using techniques such as price averaging and various indicators such as the RSI. Part of being a disciplined investor, and realizing consistent gains over time, involves recognizing favorable versus unfavorable conditions, taking actions accordingly, and patiently waiting until the next compelling buy or sell investment opportunity arises; one in which the risk-reward becomes favorable for you, from either the buyer or seller perspective, according to your risk profile. If you operate in this fashion you will experience much success as an investor.
For those that did not know, I generally perform life coaching and training services in two primary areas: 1) Personal and Professional Improvement, Development, and Growth, and 2) Financial Planning, Management, and Investing. As such, I generally alternate the articles that I write via my blogs between these two topic areas. This particular article is associated with the second area that I life coach in. So if you do not have much interest in financial planning, management, and investing, rest assured that the next article that I write will be in the area that you might have greater interest in; the personal and professional improvement, development, and growth area.
Joseph M. Brennan Jr.
CEO/Life Coach – Brighter Days Life Coaching
“Your Brighter Days Life Coach for Life”
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