Good Kids Trading (GKT) wants you to think about ways you can reduce your initial purchase price of your shares (the cost basis), and it doesn't always have to be from buying more shares at a lower price. The more you reduce your cost basis the less risk you have. This is a very important concept that has made me a lot of money.
I'm going to share with you a trade I took in Cardinal Health (ticker is CAH). I'm telling you all my 'secrets' so you can also build a plan you like, and/or you can copy some of my ideas. Keep in mind this is NOT financial advice, this is education from someone who's been doing this a while, but I'm not a professional and I'm not a certified advisor!
Why CAH you might ask? Well CAH is a dividend aristocrat. You remember those, I wrote a whole series on GKT's way of trading Dividends. If you haven't read the series you should. I broke down exactly what I look for when finding dividend stocks for my portfolio.
The power of dividends, other than some income, is that every time I collect CAH's .50 dividend that effectively reduces my cost basis by .50. I admit that doesn't seem like a lot but it adds up to 2.00 in cost basis reduction a year! Remember to zoom out, don't get too focused on the daily candles!
When to buy shares
What if you make a simple plan to buy a stock every time they touch the red/blue line? Which are the daily 100 and 200 moving averages. Create a watchlist of 5 or 10 stocks you REALLY like, create alerts for when they hit the price levels of the moving averages, that's as simple as it gets! I wrote about the power of moving averages. Look at the chart below if you bought CAH every time it hits the red line does that look profitable to you? I zoomed out because I want you to see how well this works.
Back to my example from this year. I bought CAH in March at about $69.50 a share. As we look at the chart below do you see the double bottom that formed right on the 200 daily MA?
To be clear, I didn't know it was a going to be a double bottom at the time I bought it. But I knew it hit the red line and I knew it was a possible double bottom. This is why GKT believes you should combine technical analysis with math based trades, or value investing.
CAH was bouncing off the daily 200 moving average, retesting and bouncing again. BULLISH! Now zoom out to the weekly. We are buying off the weekly 50. That means we're buying off support. ALWAYS remember to zoom out to the weekly chart! This is additional information to help you build conviction to take a trade (or not take the trade.)
The more checkmarks you get the better! I saw good things on both the daily and the weekly chart. I was feeling good about this, doesn't mean it will work, but I feel good about taking this risk. Be willing to take appropriate risk! Appropriate risk by GKT standards is 1% (maybe 2%) of your account.
I use moving averages as an easy way to help you find a good place to buy a stock, I like this buy off the red line method because I am buying when a stock has reverted to the mean and it's at support. If you decide to buy a stock I encourage you to ensure you are buying at support!
I want you to create a watchlist of stocks you like, look for stocks in a bullish trend that tend to bounce off the red and blue lines! Hint look at AAPL! Share your list with me firstname.lastname@example.org or post it in our discord.
Next time we'll walk through how I reduced the cost basis of this trade, but your assignment if you want to learn the GKT ways is:
Setup your charts with the 100 and 200 moving averages, the 50,20,10 ema. If you need help ask us on discord!
Build a watchlist of dividend aristocrats.
Set alerts around the 100 and 200 MA on your chart (alerts mean you don't have to watch the chart).
Setup some trades when your stocks hits these levels (remember you can paper trade these). You should paper trade before you trade real money.
See you next time, we'll walk through this trade so you can see how I reduced my cost basis even further and you will build your plan to reduce cost basis! If you want more information you should join the GKT discord to discuss these tips in more detail and connect with like minded people who trade the stock market! Happy Trading Good Kids!
Disclaimer: this is NOT financial advice. I’m basically just some dude on the internet who’s been trading a while, and I use the stock market as my primary source of income. None of this is financial advice it’s purely educational!