Who uses Trailing Limit Orders to buy into the stock market when it is down?

[Olórin]

Who here uses Trailing Limit Orders to purchase ETFs when the market falls?   How do you use them?  Once I finish my degree and have a significant income, I plan to regularly employ them, so that purchases are automatically made whenever the market as a whole dips a certain amount.  These purchases would come out of an Emergency Fund (maintained at about 11,000).  I don’t want to spend time talking about the emergency fund itself, as it is a non-negotiable with the wife, but she is open to making investment purchases out of it when the market is down (mostly because at my income we can easily fully replenish the EF within 1-2 months). 

Here’s a quick discussion of what trailing limit orders are (see the Buy Order section):  https://www.interactivebrokers.com/en/?f=%2Fen%2Ftrading%2Forders%2FtrailingLimitTouched.php

If you track the total market over various periods, you’ll see that there are invariably small dips which immediately recover.  A cursory glance has convinced me that dips as large as 4.5% from a current high happen every few months in a decent number of years.  An automatic purchase executed via a Limit Order would allow one to benefit from those dips, and it wouldn’t require that I actually follow the market daily or try to time the market. 

Obviously we’re all against market timing, and it’s common sense to invest money as soon as it’s available (biweekly is the plan), but since we have an emergency fund that will always have semi-available cash, does it not make sense to utilize it when the stock market is temporarily on sale?

Thoughts?  What are some ways that others have employed Limit Orders?

*Modified - see post 12 for more accurate discussion*

[Alex239]

I'm not sure if you will get much support around here considering limit orders are employed as a market timing mechanism. We know how much everyone loves market timing in these forums *tongue firmly in cheek*

[jasman18]

A better strategy for you would be to sell a put.

[mm31]

I don't really care that much. I just purchase ~$1k/month, every first of the month. In the accumulation phase, your contributions will dominate your returns anyway

[waltworks]

A cursory glance has convinced me that dips as large as 4.5% from a current high happen every few months in a decent number of years.  An automatic purchase executed via a Limit Order would allow one to benefit from those dips, and it wouldn’t require that I actually follow the market daily or try to time the market. 

One weird old trick to outsmart the stock market? :)

You should do more than give it a cursory glance: you are just market timing. You can miss out on great appreciation while you wait for a dip, or buy on a dip only to have it... keep dipping. Plus you get zero dividends while you don't own any stocks. If you're uncomfortable with P/E levels or whatever, you can certainly invest in other things (or short stuff!) but the buy-the-dips strategy won't get you anywhere.

If you don't believe me, read this: http://awealthofcommonsense.com/worlds-worst-market-timer/

If you did this over a long enough period of time and your dip threshold was small enough it would function as a crude sort of dollar cost averaging but we're talking decades. Just set up some form of regular contribution to the fund(s) of your choice and forget about it.

-W

[Olórin]

I hear what everyone's saying about avoiding market timing, which is why I mentioned in original post that I plan to invest all my earnings every 2 weeks.  I was specifically asking about utilizing cash that will be sitting around anyway (because we aren't going to abolish the emergency fund as I mentioned).  Since that money will be sitting there and not regularly invested, no one has convinced me thus far that it's a bad idea to take advantage of dips (automatically and unemotionally) when they happen.  I'm certainly fine with being proved wrong though, which is why I posted this.

[Scandium]

I didn't read it in depth, but how is this different from just placing a buy limit order at $X below current price, with good until canceled?

As others have mentioned then you might miss out, just to save a few bucks. Especially since this crazy market seems to only go up..

[waltworks]

Well, is it an emergency fund, or isn't it? If it's not, invest it on a monthly basis bit by bit over whatever time period you want, or dump it all into something at once. If it IS, don't touch it, because it's money you don't want to lose no matter what, right? 

Buying when there's a dip isn't any less risky than any other time, so you're not being conservative/safe with your cash by doing this. Or is this just an end-run around your wife to get permission to invest that emergency money? If so, bad idea!

-W

I hear what everyone's saying about avoiding market timing, which is why I mentioned in original post that I plan to invest all my earnings every 2 weeks.  I was specifically asking about utilizing cash that will be sitting around anyway (because we aren't going to abolish the emergency fund as I mentioned).  Since that money will be sitting there and not regularly invested, no one has convinced me thus far that it's a bad idea to take advantage of dips (automatically and unemotionally) when they happen.  I'm certainly fine with being proved wrong though, which is why I posted this.

[AccidentalMiser]

I use limit orders to buy stocks I want to have and to hold forever.  There are a variety of stocks that I have identified as long-term, solid performers that pay nice dividends over years.  Sometimes, these stocks are priced above where I am comfortable with buying them so I put in a limit to buy when they return to the "clearance rack".  This represents a relatively small percentage of my overall portfolio and I only do this to scratch my irresistable "stock trading" itch.

I won't beat you up for thinking about how to effectively and automatically "buy the dips" except to predict that you'll fuss with your portfolio for years trying to time this and that only to end up with lower returns than you would have if you'd have just bought the SPX and some bonds on the first of every month, month in and month out (ask me how I know.)

Here's what I'll recommend:  go to jlcollinsnh.com and read his stock series.  Adopt his dead-simple advice.  Sock your money away month after month.  In 20 years, you'll have more money than 90% of people.  Retire early and go surfing with Nords.  I wish I had taken this good advice 20 years ago when I was your age.  I'd be surfing right now.

Go back a year or two or three on this forum.  Find the posts about "I'm selling out!!  Prices are unsustainable!!" and calculate how much money these "timers" probably lost waiting for the "dip" that didn't materialize.

Best of luck to you and congratulations on being a young, smart mustachian.

[rmendpara]

If you have $5k+ in extra cash flow per month (assuming this based on your comment that you could replenish your savings in 2 months), why bother investing any of the $11k?

Just invest the extra cash you make each month that you don't need, and you're all set. If anything, maybe keep a separate $5k savings account to use when a dip comes up.

Regardless, you're trying to time the market. You could get the majority of the same gains if you just invest regularly without worrying about a xx% drop... or waiting for the "right" time.

[TreeTired]

I am all for buying dips and entering limit orders below the market.   I am not clear on the advantage of entering a trailing limit if touched order.   Don't you end up chasing the market higher before you buy in that case?

[Franklin]

NotJustFrugal,  two thoughts come to mind:

In my eyes any money in the stock market is no longer considered an emergency fund.  Simply because you should always invest with a long term outlook.

Secondly, you haven't mentioned anything about how you will set your target price.  Is it based on fundamental research, or just a percentage drop?  The former is value investing.  The latter is market timing. 

[Olórin]

I've really appreciated the responses so far, as many of them have made me reconsider some things. 

That said, I have a new proposition. I'm taking the emergency fund of the table and letting it be what it should be: an emergency fund. 

What if instead I sent my biweekly (every 2 weeks) paycheck to a "holding" fund.  Within that holding fund, I would have a trailing limit order to buy a broad market ETF if the market dropped, say, 2.5% (I'm playing around with different percentages based on how frequently they happen).  If within those 2 weeks it didn't drop, then I simply invest it all at the end of the 2 weeks, in time to replenish the "holding" fund with my next paycheck.  This way, at worst I'm keeping money out of the market for 2 weeks, and at best I'll be able to get that particular investment chunk at a slightly decreased price.  I admit this is trying to capitalize on small market fluctuations, but it's also basically dollar cost averaging with a 2 week lag time.

Does this make sense?  Does anyone know of any long term research into whether this would yield slightly higher returns?

[Franklin]

Basically you are giving yourself a 9 (day) out of 10 chance of catching the dip with the trigger, as opposed to 1 out of 10 with the schedule trade.  But what do you do if the market rises on that 1 day?  It's overly technical for my taste, but I'd be interested to hear the results. 

[Olórin]

That is along my lines of thinking, though I would say that the chances of buying on a dip with a scheduled trade are less than 1/10 (as dips can happen any time of the day).  Also, I'm going for ETFs rather than an index fund in this situation in order to increase the chances of buying on a dip, as an ETF would be purchased immediately, so that even if the dip only lasted a portion of a day, it would still execute a trade when it was down.

[warfreak2]

If holding cash waiting for a 4.5% dip was better than just buy-and-hold, everyone would probably have noticed by now...

Needless to say, people have already thought of this very simple strategy, and analysed it, and found out that it loses money compared to buy-and-hold. For example,

Buying on the 5% dips would have reduced your return by 0.1 percentage points annually

(That's 0.1 percentage points, not 0.1% - i.e. your return would be like 10.9% instead of 11%.)

[Olórin]

That article is looking at something different.  It's comparing a lump sum purchase at the beginning to holding and waiting for dips.  I'm asking about looking for the cheapest price in a 2 week period (in every 2 week period), and then buying anyway if an automatic limit order doesn't go through.  I appreciate you taking the time to find the link though, as it is interesting.

[waltworks]

Shortening the time scale won't change the end result - you will slightly underperform the market. Seriously, if you are going to do things the easy (ie index) way, just set up a schedule and stick to it. There is no simple, painless, easy, risk free way to get better returns. TANSTAAFL.

-W

That article is looking at something different.  It's comparing a lump sum purchase at the beginning to holding and waiting for dips.  I'm asking about looking for the cheapest price in a 2 week period (in every 2 week period), and then buying anyway if an automatic limit order doesn't go through.  I appreciate you taking the time to find the link though, as it is interesting.

[warfreak2]

I don't see why buying two weeks late if there wasn't a dip would take the strategy from worse than buy-and-hold to better than buy-and-hold. If the stock market doesn't dip in those two weeks, it's going to be even better to buy at the start.

The main point is that stock market moves aren't correlated with recent moves. On average, money put into the market after a 4% drop does the same as money put in at any other time. So, you have no particular reason to prefer for your money to go in at those particular times. Every day the stock market goes up 0.0286% plus a random number which averages zero; and those random numbers don't have any relation to each other, you can't predict them by looking at the recent random numbers. Your returns will be a little lower simply because of having cash that isn't in the market, you aren't getting that baseline 0.0286%/day and the random numbers don't affect your average.

Another way of looking at it: if a 4% dip meant "the market went down 4% then back up again", and this happened regularly, 4% drops would predict subsequent 4% rises and you can make very quick 4% returns by waiting for those drops. However, a 4% dip really means "the market went down 4% and continued to move the same way that it always does".

[waltworks]

To put Warfreak's comment in simpler terms: are you more likely to flip heads after you flip tails 5 times in a row? People get confused about randomness a lot because over the long term yes, you expect to see about as many tails as heads. But none of the *individual* events influence each other, so every time you go to flip, you're starting from scratch - 50/50.

Over time, the stock market rises. Within that relatively predictable trend are a bunch of random ups and downs that are impossible to predict in advance, regardless of whether you're looking at a time scale of many years or two weeks.

-W

[Sparky]

I use Limit Orders this with my "fun money stocks". I have few stocks that I have interest in more as a company than in making money from (honestly less than 1% of my investments). Rather than that, I just purchase my ETF's whenever my money hits my accounts. Seems to work fine in the end either way.