While the PCA system is suited for managing risk in just about any equity, there are certain stocks that are considered prime candidates and can produce excellent profits over time. Since we know that theoretically, the sine wave pattern is optimal for the system, we are looking for stock that demonstrate similarities to this pattern on their charts.
The first consideration when choosing a stock for the system should be volatility. We want to find stocks that really move both up and down. The larger the price swings, or magnitude, the better. We are also must take into consideration the frequency of the moves. The more times the stock swings above and below the trend line, the more opportunities we will have to buy low and sell high. The good thing is that it's much easier to find stocks that go both up and down, than stocks that go straight up.
The next important consideration is fundamental stability of the stock. Since PCA is best suited as a long-term strategy, we want to make sure the companies we invest in will be around for the long haul. Some PCA users utilize a more short-term strategy, taking advantage of extremely volatile IPO's and internet stocks, but you must make sure you are comfortable with your own selection criteria and are willing to assume the added risk that comes along with investing in stocks that may not have a long-term track record.
Stocks that work well in the
system possess several tendencies.
A highly volatile stock that has major percentage moves both up and down
is well suited for the system. This type of stock is identified by a
series of U and V patterns on the chart, where there is significant
percentage change between the top and bottom of the pattern.
Another good candidate is the "solid company" that occasionally misses a
quarter and is punished severely, only to recover after a few months.
There are many cases of these types of stocks that seem to get cut in
half once a year, and then come back to make new highs. PCA will take
advantage of the temporary setback and buy when everyone else is panic
selling.
Another type of stock that works well with the system is the so-called "rolling stock", that trades in a defined range with a discernable pattern. These types of stocks are usually fairly easy to spot on a weekly chart. We must make sure that there is sufficient percentage price fluctuation along the way to signal trades. Under normal circumstances and default PCA settings, a minimum of 20% change in stock price will be needed to signal a trade.
There is nothing as disheartening as watching a stock you hold have an immense run-up, only to sit back and watch your profits evaporate as the stock reverses and goes back down. Conversely, there are many instances where a high quality company will have their stock price decimated by the market, yet the buy and hold investor will have already have his full stake in it, unable to take advantage of the buying opportunity.
Position Cost Averaging uses this type of action to it's advantage, and
constantly adjusts the level of exposure to an equity based on the price
action of the equity itself. It lets your stocks tell you what to do
rather than the endless parade of so called "market experts", that seem
to always reccommend stocks that have already gone up, and tell you to
stay away from stocks that have achieved "value" levels. Position Cost
Averaging alerts the investor to buy on dips and sell on rallies using
mathematics. It is the compounding mechanism in the formulas that are the real key to long-term success.
