The “Cowboy Split”
Your Perfect Tool for Cutting Risk and Boosting Profits in Choppy Markets
Dear Strategic Tech Investor Reader,
Here’s how the “Cowboy Split” works.
Instead of buying your standard amount of a tech stock – for instance, 2% of your trading capital “bankroll” – you divide your entries into at least two “tranches.”
You buy your first tranche at a particular market price, but you hold off on buying your second tranche. You’re holding off in case the price of the stock falls after you’ve bought that first tranche.
Let me give you an example.
Say you want to invest in a company we’ll call Ultimate Tech Inc., which is selling for $50 a share. Ultimate Tech has a good chart, has great financials and is a strong player in a growth sector.
With the Cowboy Split, you start by investing half of your standard stock purchase at the current market price. In this case, 100 shares would cost you $5,000. But you don’t invest the full $5,000 right away. Instead, you cut that in half, and you start with $2,500.
As soon as that market order fills, you put in what’s known as a “lowball limit order.” Basically, that’s an order to purchase shares when they fall to a specified price.
Usually, I set my Cowboy Split at a 20% discount from my original entry price. That’s a good general number for filling the second half of your Cowboy Split – but use your best judgment in each individual case.
In the example we’re looking at now, you’d look to buy a second round of Ultimate Tech at $40 a share – 20% below the price you paid for your first tranche.
When the stock falls to that price, your order automatically fills and you now have an average cost of $45, a 10% discount from your original order.
The beauty of a move like this is that once the stock starts to rebound you have baked extra profits into your portfolio.
It works like this: Let’s say Ultimate rallies all the way to $60. Based on your average price of $45, you have cumulative gains of 25%. Your original order has gains of 16.6%.
But your second half has earned twice as much – 33.3%.
In today’s market, I regularly employ the Cowboy Split. And over the long haul, it’s turned out well.
I’ll give you an example from my premium trading service, Radical Technology Profits. In fairness to my paid subscribers, I can’t reveal the name of the semiconductor stock.
But I can tell you that we made our first one-half entry in July, 2014. Our lowball limit order filled during the mid-October’s sell-off – at a nearly 25% discount.
Some months later, overall, we were up 50%. But the second half of our Cowboy Split was up nearly 69%.
That’s an annualized run rate of 207%.
The Power of Profits
Thus, the Cowboy Split is a powerful investing tool. It’s an excellent way to prevent uncertainty and fear from keeping you on the sidelines and from missing big money moves.
Think of it as playing both offense and defense at the same time.
- You’re on offense when you make your opening bid.
- You defend against getting stopped out by buying more of a stock at a discount, which also increases your overall profits.
- And if the stock takes off and the lowball limit order never fills, that’s fine. When the stock has enough gains, you simply cancel the second order and look for the next big winner.
In the meantime, you’ve set yourself up to make money no matter what happens.
That’s the whole point of the Cowboy Split system. You make money in both stable markets and in volatile ones like we have today.
It reinforces the prime rule of tech-stock investing – no matter how bad things look, “never be out of the market.”
Cheers and good trading,