Develop Your Personal Investment Strategy
When you don't know what you are doing, you are at the mercy of others and their knowledge, or lack of it. You are also at the mercy of their schedule. For example, assume Harry Jones is a market "guru." He writes a market newsletter in which he lists some stocks that he thinks are quite attractive. During the month since the last issue he has been doing his research and writing his reports. Some of his reports were written the first week, others were written the second week, and so on until publication date. With each stock pick he gives a "story" or reason for buying that stock. His point might be that the company has an exciting new product or drug. Or, he might stress a coming dramatic increase in earnings.
The "story" given for a stock makes a person feel that he is buying intelligently. It also makes him a "believer" in the stock and in the service that provided the information. The problem with this kind of service is that it tends to produce lackluster results. Think it through and it will be evident why this is so. Some of the information is a month old. The author does not have time to rewrite the articles he wrote at the beginning of the month. By the time he finished, he would also have to rewrite the articles he wrote later. At best, he can only review what he has written and make any changes that are obviously needed and evident on a superficial glance over the text. If he said to buy a stock at $35 or less and it has since dropped to $30, he might say to buy at $30 or less. However, he does not have time to do all his research over again. He has a deadline to meet.
He cannot give you a precise price at which the stock should be bought because the stock could very well be above that price by the time you read his report. His readers have to be able to act on his recommendations or they will not find his service useful. Therefore he might add a few dollars to the ideal price. Say the stock has been declining toward its rapidly rising 50-day moving average. Many experienced traders know that the average is quite likely to provide support and cause the stock to rebound. If the stock will hit that average at $45, the author will probably tell his subscribers to buy if they can get it for less than $50. If he is too precise, too many of his subscribers will be unable to buy it. The mail takes time for delivery. Things change rapidly in the market. Even if his letter is sent electronically, the subscriber has not prepared himself to act instantly. He has to have time to process the information. He may not even read the report for a day or two. The point is that there is not only a lack of precision in the original report, but there is also a lack of precision in execution.
The "sloppy" $50 buy price given allows too much downside and therefore too much risk. If you buy at $50 the stock could decline to $45 and you would still have no reason to sell even though the stock had dropped 10%. The price it has fallen to is actually the ideal price at which to buy. It has simply returned to its moving average. It would have to decline below the rising 50-day average before you could legitimately conclude something is wrong. Therefore, the loss would have to be greater. It would equal the 10% drop required to reach its 50-day average plus the additional drop before you actually sell. If you have to wait for Harry Jones to tell you to sell, the loss could be 20% or more. That is your risk. Compare that with your expected gain on the position. Traders at stockdisciplines.com see the stock declining toward its 50-day moving average. They would never think of buying at $50 when they know support is likely to kick in at $45. They would not even buy as soon as the stock touched its 50-day moving average. They would wait for the stock to show evidence that it is getting support at that level. If the stock begins to rebound, that is when they would buy. There is no reason why you could not use the same precision in your own buying and selling. Think of what this would mean in the above trade. If you bought at the correct price of about $45, you would have saved that 10% (the $5 drop from $50 to $45). Not only that, but even a close that is only of 3% below the moving average would give you a legitimate reason to sell, because the moving average did not provide the support it should have. Therefore, you know that something is wrong. You would not have to wait until the stock has lost maybe 20% before receiving the notice that you should sell.
If you had your own procedure for finding and buying stocks, you would be able to locate your picks with little more time than it would take to read the newsletter. You would scan your own "watch list" for a few moments each day. If a stock were nearing its rapidly rising 50-day moving average, you would know it. In other words, you would see it coming and have time to prepare yourself mentally to act at precisely the right moment. Having your own procedure should enable you to buy and sell at much better prices. Since risk of loss is reduced when you are able to sell quickly when a stock drops below support, developing your own procedure for selling can also substantially reduce risk.
Dr. Winton Felt maintains a variety of free tutorials, stock alerts, and scanner results at www.stockdisciplines.com has a market review page at www.stockdisciplines.com/market-review has information and illustrations pertaining to pre-surge "setups" at www.stockdisciplines.com/stock-alerts and information and videos about volatility-adjusted stop losses at www.stockdisciplines.com/stop-losses