Saturday, 29 September 2007

Dollar Cost Trading

Link: Dollar Cost Trading

We've all heard of Dollar Cost Averaging but Steve Navra has a trick called Dollar Cost Trading. Basically, he screens out horrible firms from the ASX200 and then uses a secret algorithm to buy stocks when prices do down heaps and sell stocks when prices go up heaps. The traditional buy-and-hold strategy relies on long-term rises in stock prices, but Dollar Cost Trading allows you to make money even when there is a gradual decline in prices. The profits come from exploiting short-term volatility. There is a tendency for humans to sell when stock prices go down heaps and to buy when stock prices go up heaps. DCT profits from exploiting these people's losses. This strategy then requires enough irrational or panicky people around. Once people start to realize that money can be made from a contrarian approach to investing, the profits from contrarian investing will diminish.

Looking at the graph above, it seems pretty simple what is happening. Even though I'm sure Navra will not release the algorithm, you can pretty much construct your own. Buy if stock prices go down at rate x and buy if stock prices go up at rate y.

What really impressed me were the fair fees: "NavraInvest is unique within the funds management industry in their approach to fees: they only charge fees if they perform! The basic goal of their funds is to provide performance significantly above the ASX200 index (for the Blue Chip Australian Funds). Indeed, if they fail to perform better than this index, they will not charge any fees at all. Most other fund managers will charge a fee regardless of their performance (or lack thereof), but NavraInvest are so confident in their ability to perform that they are willing to commit to maximising the returns of investors by only charging for out performance."

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