Why the Best Stock to Buy May Be the One You Sold
Let's look at the art of the remount and how to employ the strategy.
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Few things in trading are more frustrating than selling a stock and then watching it go straight up after you make your decision. It happens all the time, but the typical response of many traders is to shrug, take the symbol off their screen, and move on to the next trade.
There are many stories among long-term traders about buying Apple AAPL at a split-adjusted price under a dollar in the early 2000s and quickly flipping it for a double or triple. Of course, the stock then proceeded to go almost a thousand-fold, but it took many years before some of those traders touched it again.
Selling a stock should not necessarily mean the end of your relationship with it. Quite often, stocks that are sold are still very good ideas, but it is easy to let a past relationship color the way in which a stock is viewed.
It is convenient and logical to think of each stock you trade as a nice, neat little package. You are either in or out, and once the trade is over, you move on to the next one. The reality is that one good stock can offer you endless opportunities for profits if you are willing to constantly sell and rebuy at various times. Why not stick with good stocks over time rather than consider them to be finished once you exit?
One of my core strategies is the "sell and remount" trade. I sell stocks that I like quite often, not because I no longer like them, but because I can generate better profits with well-timed "remounts." It takes quite a bit of effort, and there are many losing trades, but remounts offer tremendous opportunities in strong stocks with high levels of volatility.
There are two primary situations for the remount trade. The first is the sale into strength, followed by a remount on a pullback to support. The second is the sale of a weak stock when it breaks support and then a remount when it finds another support level or improves technically.
I will almost always make at least a partial sale of a position into a strong move. As the old saying goes, no one ever went broke taking a profit. However, I will also immediately start looking for an opportunity to remount those shares as the situation develops.
Selling into a gap-up open has a very high level of success as there is almost always some profit-taking in that situation. If the stock pulls back and I still like the fundamental situation, I will start looking for a remount at a lower price. Sometimes, it requires some patience, but ultimately, the overbought conditions will relent, and a better entry point will develop.
There are also many times when strong momentum will continue, and the early sale will be suboptimal. In that case, I don’t hesitate to rebuy if I believe that momentum may continue to build. It is always a judgment call, but there are often signs of sustained momentum after a gap-up open that I am willing to embrace. Selling into the initial strength gives me some time to consider if this situation should be chased or if a more patient approach should be used.
On the flip side is the "stop-out and remount" play. In a poor market environment, when stocks are down-trending, traders often engage in bottom-fishing. The goal is to try to buy as the stock is washed out and is about to make a turn. It is not an easy task, and if you keep averaging down, it is very easy to find yourself buried in too large of a position. When you constantly add to a down-trending position as it keeps sinking, it changes the emotions surrounding the trade and often leads to impulsive decision-making and poorly timed sales.
Rather than keep adding to a stock that refuses to bounce, I will sell at a predetermined point and then try to remount lower. This prevents the position from growing too large at the wrong time and helps make me feel in control of the situation. I’m no longer at the mercy of this annoying stock that seems to tick lower every day. It doesn’t matter if I end up rebuying at a higher price point. What matters is that my timing is better, and I can catch some sustained upside movement.
The bottom-fishing remounts are often some of the best-paying trades, as it is much easier to ramp up position size when the price action does improve. There are stocks that I’ve followed for years that I still believe hold great promise, but they can languish for a long time. I’ll reduce my position and then try remounts each time the chart offers a good try. While I wait for the big payoff, I play oversold bounces with this strategy and adjust my position size.
I often think of remounts as a form of stalking a stock. I am confident that I’ve identified a good stock, but I need the right timing to maximize profits. The best way to do that is to constantly sell and remount as conditions develop. When you approach a stock in this manner, you form a very different view of it than if you make a single buy and then wait and hope it works.
The sell-and-remount strategy is very powerful, but it requires a lot of time and careful management to be executed well. If you are willing to make the effort, it should improve your returns.
At the time of publication, DePorre had no position in any security mentioned.
