RELATED TOPICS -->   | About TroughFinder | How to use & interpret TroughFinder signals |

As a PowerStocks subscriber, you will realise that timing of troughs and safe JSE entry points is our forte and thus an important part of the value you derive from your subscription. Troughs are a natural part of life on the JSE and are the lowest points achieved during periods of JSE contraction. Troughs can be small (up to 2.5% contraction and harder to detect), medium sized (up to 10%) and large (correction is a better term, greater than 10%). The larger the trough the more accurate we can be in picking out the reversal point or "ground zero".

Troughs occur once every 2-3 months on average and are tracked by our TroughFinder algorithm and signals posted on a TroughFinder chart weekly in WJP (for standard subscribers) and every 2nd day in the JBAR reports (for PRO subscribers). In addition, PRO subscribers receive HeadsUP! alerts on trough events to allow them to time trades immediately to maximise gains or minimise losses.

Troughs are pointed out by our TroughFinder-II, STORM5+, QUANTUM3 and BIG-DIPPER timing signals. They identify periods of extreme selling and panic, accompanied soon after  by an immediate rush of returning buyers. These signals can be scary as they ask you to invest after a huge sell-off when everyone is still very nervous.

Safe entry points (Bullish Markers) are pointed out by our BITS, QUANTUM3 and STORM1 timing systems. They are different to troughs as they identify periods of exceptional strength in the JSE that are likely to lead to even further strength. These signals can be scary as they ask you to invest in the JSE after its made a huge leap - normally the time everyone is scared to invest as they fear a pull-back is due.

Regardless of if the signal comes from a trough system or a bullish system, you need to prepare for what you are going to buy when the signal occurs. This HOW-TO is here to allow you to understand the sequence of events leading up to a trough or bullish event, and what steps you can take to capitalise on the moment. If you want to understand the logic behind our cutting-edge trough-finding and signalling systems then click on the RELATED TOPICS links on the top of this page.

HOW TO BENEFIT FROM TROUGHS AND BULLISH ENTRY SIGNALS
There are a number of uses of having advance information that there is a high probability that we are in a trough reversal or a period of JSE strength.

RISK REDUCTION : Investors buying their favourite shares during bottoms of troughs are implementing a great risk reduction strategy by "getting in at a low price". If the JSE is troughing then chances are (going according to the rising tide floats all boats analogy) your favourite shares will rise with it. So by buying your shares in a trough, you reduce your risks against the share dropping shortly after you bought it (a nasty habit encountered by many investors!) Provided you have done your due diligence on the share, through many of our screens and through your own personal inspection, then buying that share in a  trough means you are probably getting it for the best price at that time and therefore significantly reducing your risk of the share dropping shortly after you bought it.

PERFORMANCE ENHANCEMENT : Even if you are a regular investor who puts away money diligently each month or quarter into the JSE, you stand to significantly boost your returns by timing these purchases into troughs or bullish periods since you always pay the lowest price at that point in time and/or are virtually guaranteed to have your shares follow the JSE up. Buying in troughs (buying the dips) as opposed to buying any old time has an incredible compounding effect on ultimate returns, especially over longer term periods. Our tests show that you can literally triple your stock market performance by buying into troughs as opposed to specific or even random dates of the month.

SPECULATION : PowerStocks' SwingTrader product relies heavily on trough formation to enter trade BUY signals. Swing-traders are short term traders that trade with geared instruments such as warrants, single stock futures (SSF's) or contracts for difference (CFD's) to capitalise on short term market bounces. Even if the JSE only goes up 2%-3%, these geared instruments can offer up to 5-10 times the return (10%-30%) made by the JSE. SwingTraders can significantly boost their returns per trade by getting in early straight after a trough bottoms-out.

ENTRY SIGNAL FORMATION PROCESS
PowerStocks have specific algorithms that tracks the JSE on a daily basis seeking out the formation of troughs or bullish entry points. PRO subscribers will be alerted to the beginning of Trough formation through the HeadsUP! alerts blog, whilst standard subscribers will be alerted to status of trough formation in the signal charts in JBAR once per week. PRO subscribers will also be able to track the progress of the trough through the JBAR reports published at the JBAR Cafe' on Mondays, Wednesdays and Fridays.

We name our trough/peak pairs by using the North Atlantic hurricane naming convention. So for example the current trough that is now forming on 25th Jan 2010 is trough Mindy, and the one before that was trough Larry.

Troughs formation is initiated by the issuance of a TroughFinder A-signal. More A-signals can be generated as time progresses and the trough deepens, and these signals are added to the previous signals to capture increased selling intensity. The bigger the A-signal the better the trough opportunity and the more accurate our trough reversal signal is going to be. When you finally see a TroughFinder C or B signals, those are your BUY signals. There can be 2-3 BUY signals in a trough, either a few days before ground zero, on ground zero itself or a few days after ground zero. The accuracy around ground zero is only 2-3 days but is pot-luck. More often than not, the signal is after ground zero. The whole trough forming process from when you see the first A-signal to when you see the first B signal  can take from a few days to several months!

HOW TO PREPARE FOR A JSE ENTRY SIGNAL
When TroughFinder, BITS, STORM, QUANTUM or BIG DIPPER eventually cough-up a BUY signal, marking a high probability that we have reached ground zero of a trough or a point in time where the JSE is going to rocket upward, you do not want to be panicking and scratching madly around to figure out what you are going to do to capitalise on it. You must start this preparation work when you see the first TroughFinder A-signal or warnings in HeadsUP or the JBAR signal charts show you the signal is going to trigger soon.

Assess the risk
Go and read the latest WJP to assess the health of the market. Go the the Trading System Actuarial Tables (TSAT) and find the table for the system that generated the alert to asses its win-rate (probability of not losing money) as well as the gain/loss ratios you can expect for various holding periods. This will give you and idea of how risky the trade is and what to expect over the course of the next 5, 10, 20 up to 100 days. If the tables tell you the system only starts performing after 40 days but can be volatile for holding periods less than this, then don't go for highly geared risky derivates products and stick with vanilla (ungeared) shares or ETF's.

For Lazy Investors
For the "lazy investor" (and we mean this with no disrespect, this is a good strategy!) it could simply be you are going to invest in an ETF that mirrors the JSE, such as SATRIX40 or SATRIX-RESI. Regular accumulation of index ETF's during trough periods is a magnificent investing strategy. It is one share to purchase that offers instant diversification (itself a superb risk reduction strategy).

The diversification characteristics of an ETF (since it represents all top-40 shares in the JSE for example) coupled with Trough formation buying is a super-charged version of a well known lazy investors' strategy known as $-cost averaging. With $-cost averaging you regularly invest fixed amounts in the JSE and by so doing, when the JSE is expensive you can afford less and thus are buying less and when the JSE is cheap you can afford more and are thus buying more. This strategy forces you to invest less during expensive times and more during cheap times. With TroughFinder, all you are doing is ensuring you are ONLY investing in cheap times!

Individual Shares
If however, you prefer to invest in individual shares then you need to do a little more prep work. When we feel a trough is nearing a reversal (i.e. its about to reach ground zero) or a signal is about to fire we issue an email alert to all PRO subscribers that we have published new strategy candidate lists to the web site. These are lists of JSE shares that qualify for the various strategies we track.

The minute these are published you are advised to start doing the groundwork in preparation for the first BUY signal. When the BUY signal comes you must already have drawn up a list of the shares you want to invest in. STANDARD subscribers will learn of the trough formation when they read their next edition of WJP (Mondays).

To find these individual JSE shares you must go to the STRATEGIES main menu as shown below:



The theory behind each share selection strategy is covered in the "STRATEGY THEORY->" menus and the actual share lists (candidates) are published in the "STRATEGY BLOGS->" menus. Our most used, successful and popular strategies are Magic Formula, Piotroski and CANSLIM. It is suggested you start with these.

For large troughs with greater than 8% contraction, we also re-run the “V-Rebound” strategy (also termed "Crash Peak Recovery") candidates, representing the largest shares that got sold off the most, as our research has shown that these shares are likely to  benefit the most from a subsequent rebound.

There is also a "lazy investors" version for individual share purchases, and that is our RiskCurves BLUECHIP portfolio. These shares have statistically proven themselves to be the most friendly risk free investments on the JSE over time, offering superior growth. With BLUECHIP you just have to buy the shares without doing any screening or analysis. Its the next best thing to an ETF.

If you are a long term investor and have been accumulating many shares over time, then the shares you buy during a trough may be governed by your need to "rebalance" your portfolio. Although you have carefully selected various shares from various diversified sectors (to minimise your portfolio risk), it is quite possible that some shares in your portfolio have done much better than others and your portfolio is now "out of balance" or "skewed" and no longer offers the diversification characteristics you originally intended. In this case your portfolio needs to be "rebalanced" and you will either do this by buying more of the shares you originally purchased for the sector that is now underweight in your portfolio or better still you will select other promising candidates from that sector (to diversify within sector.)

SwingTraders and short term speculators
If you are a SwingTrader you need to do prep-work as to which geared instrument you are going to trade with. The nature  of warrants, SSF' and CFD's change over time and things such as gearing, price matrices, initial margin, knock-out levels and time-decay all fluctuate over time so go into your on-line brokerage account and identify upfront what you are going to trade with. In most instances we give an indication of which instruments we will be trading with and you could mirror those.

ACTING ON THE BUY SIGNALS
Eventually one of our systems will cough up a BUY signal. When this happens it is saying "Based on what I have seen with several breadth ratios exceeding certain thresholds over the last 14 years, the ratios I saw yesterday are associated with a high confidence event of a trough reversal or further strength in the JSE."

Note that although our systems generate "high confidence events" that are remarkably accurate, they are NOT PERFECT! If you are a long term investor that is accumulating equity in solid shares over time then this accuracy will not concern you too much. Whatever happens after you buy, you will be better off than if you had blindly bought before the trough started forming. So you will be less concerned with exact accuracy. It is highly unlikely (but not impossible) that the markets will severely crash straight after you have bought. Remember as a long term investor you are being governed by your actions by the SUPERModel and LBYC long term investing signals anyway.

Shorter term traders obviously WILL be concerned with accuracy, especially when using exotic geared instruments with which to effect their trades, since small losses on the JSE can turn into big losses for geared trades. Because of this the standard Swing-trading rules apply with respect to ensuring you don't bet the farm on any one trade, etc. It is advised traders lookup the actuarial performance charts of the signal that fired the BUY signal.

Generally when we issue a signal alert we give some guidance on what the probabilities of its accuracy will be. Small TroughFinder A-signals followed by B or C signals will receive words of caution from us.

Quite often, multiple TroughFinder B-signals will mark a trough and what many subscribers do is play 50% of their trade allocation to the first B signal and the balance on the next B signal.

RELATED TOPICS -->   | About TroughFinder | How to use & interpret TroughFinder signals |
 
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