Sometimes when you buy into a stock, it just doesn’t behave the way you expected it to do.
But rather than admitting to yourself that you made a mistake, you look for all sorts of reasons to keep holding it. Have you noticed this in your own trading and investing?
By that time the loss starts to blowout and get away from you.
And it’s a pity because one blowout can overshadow a series of good trades. Not to mention do serious damage to your trading account.
Sometimes the best trade is the one you don’t take. Once you stop buying into bad stocks, all sorts of trouble can be avoided.
So how do you avoid buying into bad stocks? Number one…
Learn to read a chart
Once you can read a chart, you can determine the trend of the market. With some basic chart reading skills, not only will you avoid buying into bad stocks, you can begin to understand what is really happening in the world.
I can give a practical example of this. Throughout 2016 many so-called China experts were predicting an imminent China collapse. But at the same time China ETF’s were moving higher on the chart.
In other words while all the bad news was coming out, the China ETF’s continued to find higher buying support.
The lesson? Follow the weight of money, not the experts.
Because in hindsight, the Chinese collapse story didn’t run to script.
Growth in China’s economy is now beating all expectations. All the talk of a collapse a couple of years ago now appears silly.
Learn to read a chart, it’s the only way to find out what’s happening in the world.
But more importantly, once you can read a chart, you can then start to determine the trend.
Always trade with the trend
Whenever you come across a broker’s report or equities analyst arguing that the fundamentals look good on a particular company, bring up the chart. What’s the trend?
If the share price is in a roaring downtrend, just let it go. Don’t buy into it.
It’s not a case of the chartist always being right and the fundamentalist always being wrong. I’ve come to learn there are some good fundamental analysts out there.
But here’s the thing…
If the fundamental analysis is right, the share price will start to turn around and make a series of higher bottoms. Wait for the chart to confirm that fundamental analysis.
But never put yourself into a downtrend, no matter how bullish a brokers report is.
And the reason most investors buy into a downtrend in the first place is because they’re looking for a bargain.
The only problem with that is, cheap stocks can become even cheaper. Real quick.
There’s a traders expression which goes, ‘news goes with the trend’. And so it does.
Stocks trending down are most unlikely to deliver good news. On the contrary, a stock in a downtrend is often forecasting the bad news to come. And when that bad news is announced to the market, the share price can often gap down suddenly in price. As a trader or investor you don’t want to be involved in any ugly down moves like that.
Trade with the trend, swim with the current and move with the market. Remind yourself of the overall trend.
Always have a stop loss order in place
Set your stop loss at the time you place the trade and use it. Act quickly and decisively if you have any doubts about a trade. Watch from the sidelines until you are more confident that the prevailing trend is still in place.
And once you know where your stop loss is…
Get your position sizing right
This is the most overlooked aspect of trading and investing. Get your position sizing wrong, buy too much stock for your stop loss, and you invite all sorts of trouble. It’s a major reason why losses can really blowout for many traders.
You shouldn’t put yourself in the position of struggling to hold on to stock, if it runs slightly against you. You should be able to comfortably hold a stock until the chart says otherwise. The market shouldn’t be stressful. If it is, you’re getting useful feedback to modify your approach a little.
And if you start putting a few losing trades together…
Don’t give it all back to the market
Have you had the experience of enjoying a run of successful trades, only to give it all back to the market?
It’s a common experience.
If you have a good run of trading and then place a few losing trades together in a row, stop trading, take a break and freshen up. This is what I call exercising your own personal stop loss. It’s a powerful rule that will stop you giving it all back. You need to rest and take a break from time to time.
Learn to read a chart, and trade the trend. Have your stop loss in place, get your position sizing right and just let the market do its thing.
And remember take a break from the market if your decision making is becoming fatigued.
There’s five things to think about which might assist you in your own investing.
Because long term success in the stock market is less about the upside and more about how you handle the downside. Don’t let a small losses blowout, act quickly and decisively.
It’s keeping the losses small that allows the winners to stand out.
Chartist, Phil Anderson’s Time Trader