Market Entry Strategy: buy trailing stop limit order

Hello fellow mustachians,

I hope you are doing well in these uncertain times.
With the recent drop of VT and quick 5% recovery in one day, I thought about a new entering the market strategy.


  • Mechanical strategy that we can automate.
  • Buy low when the market is scared. (Buy when the cannons make noises and people are looking for shelter.)

→ Use a buy trailing stop limit order at 5% lower than the all-time high to enter the market.

With this strategy I buy the VT when the market dropped by 5% compared to the ATH and get a discount compared to the ATH. So I think I could improve my returns. I would do that once a month with my newly acquired savings to build my portfolio.

How does this sound?
Do you have improvement ideas?

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And while the market keeps heading up without the -5% drop from ATH for 2 years, what do you do?
Hoard cash?

Then when it does drop -5%, you are buying at the prices higher than in the past 23 months.
Doesn’t sounds like a great idea.

Just buy at regular intervals according to the asset allocation you decide on; and maybe a bit more when it has fell extremely, if you happen to have some cash reserves.


I was thinking about it. The strategy would be:

Set a buy limit at 5% below max traded after the last purchase. There is even trailing limit order type available at Trader Workstation, so not much manual work.

Repeat after your trade is executed.

Problem: you might wait for 1-1.5 years before it happens and miss enormous gains.

Another variant: invest as much cash as you have available and in addition run this (or your) strategy to buy some extra on margin if it drops. Or you can sell calls and if market drops, you are assigned and you bought at a discount.

Problem: if you use lots of margin, you are risking to be liquidated in a serious downturn. If you are buying small amounts, it doesn’t change much. So think well how many times you will be able to buy on margin if there is a serious downturn.
Another problem: you have to repay your margin loan at some point. Will you have enough income to repay your loan if bear market goes for 3-5 years?

I know trading is fun, but nothing can beat defining and maintaining an asset allocation. You can rebalance by bands, you will automatically buy more when the market is low and sell or at least build up cash reserves when the market is high (I think I wouldn’t sell if I have too much stocks. Or maybe sell a covered call).

This is the setup I have been experimenting with, although I do this with manual limit ‘good till called’ orders. Cash is invested as per allocation strategy, but a few limit orders in the -5% to -15% range may be executed using margin.

Using a manual spreadsheet I check that I will survive a -60% drop in VT value before liquidation would kick in. You’re probably right with your second statement though, such a conservative approach means that the upside will also be very limited. Still, it was satisfying to see IBs trade notification popping into my inbox on Thursday afternoon. Wish it was better circumstances of course…

At the sums I’m dealing with the maximum possible loan can be paid off within a year. This should allow survival of a 1929 - 1932 scenario if I don’t get fired at the same time… Such a limit doesn’t scale well with increasing portfolio value or indeed early retirement, something I didn’t yet spend much time thinking about yet. At some point it is probably either too risky or too irrelevant to overall performance.

The way I approached it was that I have a 90% stocks / 10% cash allocation in the accumulation phase. If stocks drop significantly cash is moved into stocks, with cash allowed to go negative within the boundaries described above.

At the current sums the cash allocation recovers ‘relatively’ quickly through income. Whether this should all go immediately into the cash allocation I didn’t fully think through yet. There’s probably a case for continuing buying stocks at ‘low’ prices and only return to 90/10 if the market recovers or stays depressed for a longer time (e.g. > 6-9 months).

It’s good that you are thinking broadly, and I don’t think it is relevant anyway, but still: do you see a little problem in your reasoning?

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I do. :slightly_smiling_face:

I like to think that my employment is in a relatively safe / stable sector, but these kind of risks do correlate. It is a risk I acknowledge and accept at the current modest amounts, and need to re-evaluate as the portfolio grows.

I have to say though, the psychology side of business will get interesting once a decent amount of money is lost and the job looks shaky! Currently I’m not comfortable with a margin loan much beyond a year’s worth of savings.

Probably might be wiser to sell puts. At least if the market doesn’t come down you still get the cash from selling it. (puts premium will be higher on bearish days - the more consecutive, the higher the premium in general)
The two drawbacks here are:

  1. as someone said already, if it keeps going up, you will miss those gains
  2. if the market plunges, you will get assigned the option and buy at the strike price (even if the market price goes another 5 or 10% under (or more) - which is the whole point for people buying the puts you are selling i.e. covering risk)
    Maybe there is a 3. which is: 1 option is for 100 shares, so for VT, that would entails a minimum of ~10k at todays prices

Tell me where I can buy VT shares for 60$, and I’ll turn to Speedy Gonzales and buy huge amounts :slightly_smiling_face:
You’ll need roughly 10k for 1 PUT VT option