How to Not 'Jump the Gun' on a Trade

How to Not 'Jump the Gun' on a Trade
Tuesday, December 8, 2009
Chris Rowe

Not only have I made millions of dollars for individuals and institutions whose money I managed directly, but I have also done so for other professional traders who manage for other funds and individuals.

You wouldn’t believe how much I have saved people with some of the simplest, most-obvious advice on earth. Well, hopefully, I will do that for you right now. …

Resisting the Allure of a Potential 'Perfect Storm'

When you are getting ready to buy a stock that you absolutely love, it is so easy to have an itchy trigger finger. We’re all guilty of this.

I mean, when I find a stock that catches my eye, I need to see several positives in the stock before even considering putting any money into it.

So, I’m looking at the financials of a company -- from earnings and future earnings power to profit margins -- and the likelihood of the profit margins increasing.

I’m specifically looking at whether their quarter-over-quarter earnings and revenues are accelerating, or how much market share the company is gaining. Maybe there was a problem at a really great company but it was recently resolved.

I look at how many new funds have recently started buying the stock, and how smart or informed those fund managers are.

I also want to know what the major stockholders’ reputations are.

Additionally, I'm looking at how much stock the company's management owns, and how smart and experienced the company’s management team is.

In fact, I will call many of the companies and try to speak to management, or at least someone who is sharp and who knows what is happening at the company.

What to do With all This Due Diligence?

And that's only the beginning.

My next step is to look at certain technical indicators like the price/volume action, or what type of chart pattern the stock has recently developed. I look at the short interest in the stock. I look at stochastics, Bollinger bands, and much more.

My point here isn’t to give you all of the things that you should be looking at when you trade a stock. There is a lot more that you may want to know, depending on your intentions.

Every time I find a new positive in a stock, it gets me more and more excited. This tends to give even the very best traders an “itchy trigger finger.”

This happens to the savviest of traders at one time or another. The truth is that nobody knows for sure when the absolutely right time to buy a stock is.

We can use incredibly accurate indicators, but even incredibly accurate indicators in the stock market are not always going to be correct.

Something to Consider

Do you find yourself jumping in too early just a little too often? Does this cause a chain reaction that basically screws up the whole trade?

Maybe after you buy too high and watch the stock pull back to its real launching pad, you then hold the stock too long.

Why?

Because you decided that you didn’t want to sell it yet with such a small profit, and then that profit turns into a loss.

Sound familiar?

All Right, Just One More Question...

Do you want me to give you a simple, non-sophisticated strategy that will sharpen up your trading skills today?

As you may already know, I can sometimes be an expert in stating the obvious.

But I have taught thousands of traders how to improve their skills (just by stating the obvious) who have come back to thank me years later.

Here it is …

Everything I Need to Know About Investing, I Learned in Little League

This is a strategy that will really make you want to pull the hair out of your head in the beginning, but you will be worth a lot more money in the future if you listen to me on this one.

I first learned this from my Little League baseball coach, as a matter of fact, when he used to tell me to “take” the first pitch.

This basically means that, no matter what the pitcher decided to throw at me, I was to just stand there and let the baseball zip right past me without swinging at it. (I never had a problem with this because it saved me the embarrassment of swinging for the fences and missing, as usual.)

If you suffer from the “itchy trigger finger” syndrome, then what you should do going forward, is "take" the first pitch.

Don’t think of this as second-guessing yourself, because then you will simply be letting pride or ego get in the way of your profits.

There are Always New Opportunities Coming Your Way

If you watch a stock trade up to a new high of $55, and then trade down to $52 where you start to feel anxious and like you are going to “miss this one,” then take a deep breath, stare that stock right in the eye, and say to yourself, “If I miss it, then I miss it.”

Then, if the stock pulls back to something lower, like let’s say $49 or $47, then you can buy the stock knowing that you just saved yourself an extra 3-5 points.

Again, this is not a complex exercise here. But if you do it over and over again, then you will become a better trader.

Doing it the first time is easy. Doing it a second time after it worked to your benefit is even easier (anyone can do that).

But try to do this after you saw a stock you wanted to buy at $52 trade all the way up to $75 within a month! Not so easy.

Get Conditioned for Your Lifelong Investing Marathon

The trick here is to condition yourself. It’s like working out at the gym. You will never show any improvement unless you are doing something that is discomforting over and over again.

Just because this strategy didn’t work in your favor the first 3, 4, 5 or even 6 times, doesn’t make it a bad strategy. Think of all of the money that you will save over the next five years for two reasons:

1. Because saving yourself 3 points here and 5 points there really adds up over the years.

2. MUCH MORE IMPORTANTLY -- doing this exercise over and over again for a long time, no matter how many times a stock ran much higher without your owning it, will just make you a better overall trader with a MUCH stronger frame of mind. Your natural instinct will make you more money after a while.


But make no mistake about it. The KEY here is that you do this every time, no matter how many times you “miss” the stock that traded higher from the price that you would have paid for it.

Using the “working out” analogy again, it isn’t the first nine times that you lift that weight that counts. It’s the 10th time that you lift it.

The one that hurts the most ... the one that you can barely do ... that is the one that will make you stronger.

Here, you will get stronger and stronger each time you experience watching a stock trade to the moon that you'd held out on. It will hurt, but you will become stronger, and better able to deal with it.

And, over time, you will not let your past trades affect your next trade, which is probably the most-common mistake among traders.

Remember: If you miss buying a stock at $52, and watch it trade to another high of $75, it’s human nature to imagine that you owned it and you held onto it all the way to the top. This will further add to the pain of this exercise. No pain, no gain.

It seems as though everyone always thinks they would not have sold it along the way up, when that isn’t the case at all. If you are that itchy-trigger-finger guy/gal, you are prone to do pull the trigger on both sides of the trade.

The First Step Toward Curing the Itchy-Trigger-Finger Syndrome

Finally, if this is too much for you to handle, there is an alternative. You can get in the habit of buying half-positions. Decide what dollar amount you want to invest in a position, and only put half of the amount into the idea at first. You can always buy more later if the stock trades lower.

I remember doing this when I saw ExxonMobil (Symbol: XOM) break an all-time high, which was a point of resistance that the stock had attempted to break four times in 18 months.

The company had just reported insane numbers and the future looked bright, but I was buying at the high. I mean, I felt as if I almost knew for a FACT that this was the right thing to do, so I couldn’t bring myself to wait for a pullback.

I recommended buying certain “call options” on the stock, but I recommended only buying the first half of the position. This is especially important when trading options, because when a stock moves by only a few points, it could mean a difference of 20%-40% or even a 100% return.

I initially recommended buying the first half. In this case, the stock continued higher. But iif the stock were to pull back, then I would recommend buying the second half of the position -- thus lowering the cost basis.

Instead of saying to myself, “If I miss this one, then I miss it,” I said to myself, “If I only buy half of this one, then I only buy half.”

I hope that this will help you Wyatt Earp types out there. Hopefully, this will also cause you to be more-selective in your trading.

You may lose a few battles, but you will be more likely to win the war.


http://tycoonreport.tycoonresearch.com/articles/907056411/how-to-not-jump-the-gun-on-a-trade