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Reverse Scale System (RSS)

When I started investing many years ago I had no plan, no strategy, no discipline and I was losing money. However I was reading books and trying to find some good strategy which would protect my capital and make me money in this stock investing business. There is a lot of books about investing. Many of them advocates for many kinds of strategies. Many recommends investors making business plans, loss control plans, money management plans, rules etc., but none of them actually tells you how to do it. Maybe there are some books out there, but I haven’t found them yet and I do not have enough money and time to buy all of them to find some.

However there is one book, which I found very valuable and which is probably the only one which tells you that. I am talking about Stock Market Stratagem by Braden Glett. I am not going to re-tell the story and rewrite the entire book here. It is the kind reader who should read it to grasp the idea of this strategy. If a reader doesn’t want to buy the book he can find information on the Five Minute Investing website or go to Useful Links.

However let me provide a short excerpt why I consider buying this book invaluable. It is the first book providing a beginning investor with a step by step guidance how to create a control loss plan, evaluate stocks and many other helpful advice on investing in the stock market. What many other books just vaguely say about investing, Mr. Glett is explaining step by step.

What are the basic rules of this strategy?

1) Buy a new stock position only when the market is in confirmed rally

I made this mistake all the time. I was buying no matter what the market did believing my stock would survive correction easily. Why not they were all fundamentally very strong. Obviously they didn’t and stop loss limits kicked me out and I ended up collecting one loss after another. Then i learned to follow the trend of the entire market, but with no further progress. I still was losing money. I was following IBD and their “market barometer” but it didn’t work either. It happened that IBD considered the market in confirmed rally but it was a short live rally. Even as of today IBD calls the market in confirmed rally. However look at the chart. Do you see any rally?

Market Chart

I do not see any yet. Maybe there are some experienced investors out there who see it and are ready for trading. However the only thing I see in this chart is two short live rallies only. Mr. Braden Glett is adding one more rule to identify the market in rally. The 50 day MA should be above 200 day MA to consider the rally really confirmed. In his book, you can find why. As you can see, the first circle indicates that the rally in May 2008 almost made it (a brown line almost got above the red one). Then it failed however. The second larger circle indicates the confirmed rally as per IBD. I don’t see anything. This is why I kept my own market status in “Correction” on the top of this blog. When the market gets above its resistance line (thin blue straight line) I would change the status into a “rally attempt” and when 50 day MA gets above 200 day MA it would be a confirmed rally. I made the same mistake again when I implemented these rules into my trading in August 2008. I didn’t wait for this rule to happen and I started buying. Now I could have dreamful nights instead of having my portfolio in 6% loss.

2) Select only fundamentally strong stocks with a momentum

Easy said difficult to do. Many books advocates the same. Many books let you going thru balance sheets, do difficult research, study companies’ tables, etc. IBD provides such service for subscribers and select all fundamentally strong companies for them. However a subscriber has to pay about $160 a year to get those tables. There is one easier way to select such companies. One of the rules is to look for the stock making new 52 week high. There are many other rules in the book how to evaluate stocks.

At the beginning of this portfolio I broke this rule as well. I am a human and I fight with impatience and get-rich-quickly madness. When the screener stopped selecting new stocks I have bought pets. Another way how to get into a financial hell. However I passed those lessons and will not repeat this mistake again. This blog shall be my watch dog helping me to follow the rules by identifying my thoughts why I am buying, selling, etc.

I created a screener which I fed with all criteria Mr. Glett is naming in his book, however I modified them a bit. I added some other rules from CAN SLIM strategy (screening criteria William O’Neil is presenting in his book How to Make Money in Stocks), but I made the criteria stricter than both authors recommend, so the only very best stocks should pass through the screener. A good training for patience.

3) A Control Loss Plan

This is probably the most invaluable section of the book. For many years I have been struggling creating some sound investing plan which would work, protect me against losses, protect me against over-extending the risk, help identifying the risk at all, avoid over-investing my portfolio, etc. I usually invested all my money and was forced to sell upon a margin call. Or I set up a stop loss order about 7% below my purchase price as many other books recommend and ended up collecting one loss after another, so my portfolio ruined down by 60%. This control plan in the book shows the proper way how to protect the portfolio against extended draw down even with stop loss bigger than widely recommended 7% – 10%. Even with 50% stop loss an investor can lose only 3 to 5 per cent of his money when the monies are managed correctly. This stop loss may sound horrific, but believe or not I can sleep much better knowing that next day I wouldn’t be kicked off with another loss. Mainly in this volatile market we are experiencing these days.

Well, these are the main items I would consider the most important and for which I recommend buying this book. The book is of course full of many other advice such as pyramiding, trailing stop loss and many others. Read it and you would see what strategy this blog records for the future.

1 response to “Reverse Scale System (RSS)”

  1. MickyS says:

    I just finished reading the Five Minute Investing series. Much like you I’ve read lots recently as I’ve tried to educate myself. So many of the concepts he speaks of were already in the forefront of my mind, he is just weaving it together in a very easy to follow and understand method.

    And yes, the very specific rules and steps on how to implement it are certainly welcome. I will tweak the stock picking process a little to help add some criteria I picked up by reading 100-baggers (another good read), but otherwise I think this is brilliant.

    I’d be interested to give you an update on how this has worked out for you.

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