Limit-order buying technique -- Good/bad?

[kork13]

I've just got a general question for the traders out there, as far as techniques for buying individual stocks/ETFs. Bottom line, is this a smart method for me to follow, or could I do it better? I know I'm asking for a 100% opinion answer, and I understand that "it depends on your investment goals, style and risk tolerance" is the proper response... But acknowledging that, I'm just looking for any thoughts.

I'm currently investing in an ETF as a generally long-term investment, and as it's my first venture into trading, I'm also using it as a learning testbed for myself. I am currently sending $50/mo to my brokerage account (basically enough to buy 1 share each month), and I also keep some cash (~$500) in my sweep account for "opportunistic use".

So what I'm doing is setting a series of 60-day Limit-order purchases at progressively lower values, with the idea that if/when the ETF dips in value, I can snap up more shares for a lower price. For simplicity, I just set the orders to execute at each $.25 drop in value ($49.75, $49.50, $49.25, etc), normally down to about $1 below the current price. Sometimes my orders will execute in a matter of days (and I re-create lower limit-orders), and other times the full 60 days will elapse, the orders cancel, and I reset my limit-orders from the now-current price.

Hopefully that all makes sense... To me it seems like a reasonable way to take some advantage of temporary dips in the ETF's price while not having to monitor the value hour by hour (normally, I can set it and forget it for at least a week or two with little-to-no input). But my bottom line question is this: could I do better for myself by operating somehow differently?

[kv968]

Hopefully that all makes sense... To me it seems like a reasonable way to take some advantage of temporary dips in the ETF's price while not having to monitor the value hour by hour (normally, I can set it and forget it for at least a week or two with little-to-no input). But my bottom line question is this: could I do better for myself by operating somehow differently?

That sounds like a reasonable approach if you don't want to monitor it on regular basis. Of course it would depend on how volatile the ETF is as to what increments you want to use for your lower limit prices. If it's somewhat volatile you might be better off setting the spreads a little wider.

One question I have though, is this in a brokerage account where you're paying for the trade or is it in Vanguard or something similar where you can get free transactions? If it's the former, then I'd suggest changing your method since you'll get eaten up by commissions.

[jpg7n16]

My question would be, where are the funds coming from to fill your orders?

It seems like a good idea to buy in at progressively lower prices, but not if a big chunk of your account is sitting in cash to do it. If the market goes up, your orders never fill and you're stuck with too large of a cash allocation (as well as missing out on the market upside from cash that could have been invested).

[kork13]

One question I have though, is this in a brokerage account where you're paying for the trade or is it in Vanguard or something similar where you can get free transactions? If it's the former, then I'd suggest changing your method since you'll get eaten up by commissions.

It is Vanguard, so thankfully I get the free ETF trades. Otherwise you're right, the cost of buying single shares all the time would be exorbitant...

Of course it would depend on how volatile the ETF is as to what increments you want to use for your lower limit prices. If it's somewhat volatile you might be better off setting the spreads a little wider.

As for volatility, it's not outrageous, but there definitely have been some days/weeks with rather significant ups/downs. The ETF is VYM, and though I've only been in it for about a year now, it's done pretty well for me, and I'm pretty comfortable with it overall. But could you explain the reasoning for changing the spreads based on volatility? My thinking on the increment is this: $0.25 is about .5% of the share price, so on an average day in which the price goes down, it's about a 50-50 chance that the price will dip far enough to trigger an order -- most most down days seem to be between $0.15-$0.40. So just my way of thinking, but I suppose it's mostly just a guess. .....besides, a quarter ($.25) is a nice round number, and I'm a bit OCD, so I rather like nice round numbers.

My question would be, where are the funds coming from to fill your orders?

It seems like a good idea to buy in at progressively lower prices, but not if a big chunk of your account is sitting in cash to do it. If the market goes up, your orders never fill and you're stuck with too large of a cash allocation (as well as missing out on the market upside from cash that could have been invested).

I keep about $500 or so (<2% of my total taxable assets) in my sweep account (money market) for these buys. So not really very much, just enough to cover a week or two of down days that might trigger the buys. As I have some spare cash in checking, I'll send it to my sweep account to refill it.


I guess i'm glad it sort of makes sense... At least I'm not going off the deep end or anything without realizing it.

[kv968]

As for volatility, it's not outrageous, but there definitely have been some days/weeks with rather significant ups/downs. The ETF is VYM, and though I've only been in it for about a year now, it's done pretty well for me, and I'm pretty comfortable with it overall. But could you explain the reasoning for changing the spreads based on volatility? My thinking on the increment is this: $0.25 is about .5% of the share price, so on an average day in which the price goes down, it's about a 50-50 chance that the price will dip far enough to trigger an order -- most most down days seem to be between $0.15-$0.40. So just my way of thinking, but I suppose it's mostly just a guess. .....besides, a quarter ($.25) is a nice round number, and I'm a bit OCD, so I rather like nice round numbers.

I've been kinda doing the same with VYM too but not all my orders got triggered either. I try to look for support levels in the chart and set them around there. If they get triggered,ok...if not, I'll either wait or move on to something else.

As far as volatility, what I mean by changing the spreads is if it's a more volatile ETF you might want to set the limit order even lower since it may swing that much in a short period.

Although I figured since you said it was a longer term holding that it wasn't that volatile.

It's kind of letting setting a stop order...if the stock is volatile and you set it too close you'll get stopped out with nothing unusual going on. Same with buying in. If it swings a lot (which VYM really doesn't), you might get a better price if you set the limit lower than just 0.5%. In your case though $0.25 or even $0.50 increments should be good enough.

[jpg7n16]

I keep about $500 or so (<2% of my total taxable assets) in my sweep account (money market) for these buys.

I guess i'm glad it sort of makes sense... At least I'm not going off the deep end or anything without realizing it.

Well the key to making money is to buy low and sell high, right? So buying at lower prices makes sense in general.

However, given that these are very small increments on a very small percentage of your overall account. The benefit from the strategy would be... very small

If in 20 years the shares are around $150/each (5.6% return), does it really matter if you bought in at 49.75 or 49.50?

[Bryan Cranston]

Don't see how this could be bad at all. Unless you change your mind about the stock's value and are willing to buy above your limit, which yet has to be met in the market.

Then there's the possibility of flash crashes wherein you no longer want to buy the stock after all.

[snafu]

How long do you plan to continue the buying one unit at a time experiment? Do you have a 'stop loss' Sell figure?

[JBinKC]

Before you formulate a strategy what sort of transaction size are you dealing with and your transaction costs?

I think finding a company that offers a DRIP where you can purchase stock directly from the company commission free might be the cheaper alternative if you are buying on such a small scale.