The Most Fair Valuable System

I was raised to be a value investor.

And when I say raised, I mean I started out reading Warren Buffett books.

My early trading brain was trained to believe that buying things on the cheap was the all-time best way to trade. In fact, if you read enough value investing books, you'll come to believe that any other style of trading is an exercise of ignorant futility.

But it makes sense.

When you go shopping for a car, do you look for the car that's been in an upward trend lately and then try to get on board? Do you wait around until the car hits an all-time high in price, and buy then because it's hot?

Or you do try to get a deep discount?

For me, it feels great to buy a car at a price that I think is way below what it's worth. It's borderline euphoric.

And that applies to everything. I like groceries on sale, books on sale, and clothes on sale. I even like sales on sale.

That's why value investing is so appealing. Buying something at a discount is psychologically rewarding and intellectually appealing. Buying something below Fair Value and watching the value of your position rise inevitably to profitability is a joyous activity.

There are a few problems, though.

One, if you're a value investor, you're buying when everyone else is selling. That can be intimidating (and scary). Maybe you've forgotten what it was like in the fall of 2008. I haven't. I was out of the market during that time and was still frightened to death.

Watching the 2008 stock market plummet day after day after day was petrifying. Don't get me wrong, I know how much money could have been made if you were strong enough to buy stocks during that bloodbath.

But, at that time, there was no way I was strong enough. There was just too much red for my brain to handle. Like I said, buying when everyone else is selling is really, really scary.

The other problem with value investing is figuring out what Fair Value is. How do you buy something on sale if you don't know what it's worth?

Let's say a car is worth $10,000 but it's marked up to $30,000. If you get a "discount" and buy it at $20,000, you've gotten a rotten deal. If you don't know what Fair Value is, you're not a value investor, you're an unprofitable investor.

If you can overcome those obstacles, however, value investing can be very lucrative. Just check out Mr. Buffett's track record over the past fifty years. Buying on sale has been very, very good to him.

That's why I've been working on value investing robots for many years. If it's possible to determine Fair Value mathematically, I've solved one problem. If I can use a robot to combat the fear of buying during a selling maelstrom, I've solved both problems.

To determine Fair Value, I've found that a long-term Simple Moving Average (SMA) works nicely. If you use an SMA longer than, say, 200, you've got a nice proxy for Fair Value.

Why? An SMA is an average of all the past prices. If you average the prices of last 300 bars, for example, that takes out a lot of noise. A long-term SMA gives you a good, unemotional idea of what that financial instrument is really worth.

Then you simply have to wait for price to fall far below that Fair Value. Once it does, all you have to do is buy and watch it eventually rise up.

Last, if you don't put a stoploss on your trade, you don't get stuck in the last remnants of that violent trend down and suffer a bunch of unnecessary stop-outs. The journey becomes even smoother.

That's exactly what I did with my latest robot. I determined Fair Value, waited for price to drop to an extreme, and then traded it back up toward Fair Value (going for a small target).

Using a small trade size, it made $3,833 over the past decade and a half and had a maximum drawdown of under $1,300 (according to MT4 data; Tradestation was very similar).

And it never lost a single series of trades.

In fact, 92.3% of the time the trades closed out within twenty-four hours. Even more, the trades closed out in 5 days or less 98.6% of the time!

By waiting for those favorable Fair Value situations, you can make money, win 100% of every series of trades, and be out of your positions within 5 days over 98% of the time. That's the value of value investing.

All of this begs the question: So what happens the other 1.4% of the time?

I'll reveal those details tomorrow during our Thursday webinar at 2 pm EST.

I'll also let you know what currency pair I used for this example (if you follow the blog, you won't believe which one it is).

Hope to see you then.

To see the recording of that webinar, go here