Morning Market ThoughtsGood morning. It looks like the party is continuing for at least one more day — Hopefully…many, many more! We want to get a good start out of the gates in 2018. It’s always good to have a cushion if you are tracking your performance.
Our Growth Stock List (GSL) continues to work really well, and I encourage you to consider this approach:
If you tend to be a short term trader, you are likely leaving a lot of money on the table that you don’t even know about. Strong stocks remain strong for much longer than the typical short term trader thinks. You take advantage of a quick pop and are happy to make 5%-10% on the move. Then you sell and start looking for the next big mover. But no one except a liar has a perfect track record. So some of your new selections are going to lead to losses. Two steps forward, 1 step back. And sometimes, it’s one step forward and 2 steps back. Each time you initiate a trade on a new stock, you’re starting from scratch. You are obviously risking your precious trading capital because you have no profit in the trade. So if you are wrong, you take a step backward.
Meanwhile, that strong stock (such as those on our GSL) has been resting. It’s pulled back from the run that rewarded you…but it’s pulled back in an orderly fashion on light volume, indicating that the institutions that were buying the stock are not selling the stock. Rather, they are hanging onto it. Perhaps they are not buying because they want the stock to settle down rather than continue higher. They are looking for opportunities to buy more stock and don’t want to compete with retail momentum investors for the stock. So they wait…and the stock rests. At some point, the stock takes off again because, well, because that’s what strong stocks do. Meanwhile, you’re off somewhere else looking for your next meal ticket.
You’d have been better off still holding that stock through the pullback because you have a profit cushion. Your initial capital is not at risk, your profit are. I’ve often said, “Make better decisions by making fewer decisions.” The meaning behind this concept is pretty simple: The decisions that turn out to be good ones should be held for as long as possible. As long as your good decision is leading to profits, then stick with it. The bad decisions can be corrected before they cost you too much money.
Market Wizard Mark Minervini says, “It’s OK to BE wrong; but it’s not OK to STAY wrong.” So you reverse the decisions that don’t pan out quickly. And you wait…and you wait…and you wait to find the next strong stock at an opportune buy point. You don’t chase some ragged stock because you’re eager to make up for the loss you’ve just taken. Perhaps you’ve had a string of losses (hopefully small losses because you’ve resolved your bad decision). It happens. So are you going to start chasing a bunch of crap stocks in the vain hope of getting back to even? No. That’s a fool’s errand.
Instead, you remain patient. You do research to find the best candidate. Look, it’s hard to find great stocks with great setups. Frankly, you’re not going to find that many. They’re difficult to find, which is why most people lose money over time in their trading. Rather than stick to high standards in finding stocks that merit your hard earned capital, you lower your standards. When you think about it, dropping your standards isn’t particularly smart. If you’re searching for a strong person to fill a vacancy in the accounting department, but you haven’t found the right one, are you going to give up and hire the guy who flunked math in high school who, during his job interview, asked how many vacation days he’ll get, and whether his desk will be close to the coffee machine? Great! You’ve filled the position. But you’ve forgotten your goal — to find someone who can do the work. But since you couldn’t find what you were looking for, you just took the warm body. Wouldn’t it have been better to just keep looking rather than give the HR department more job security by hiring a slug?
Trading is no different. If you wait for the right opportunity, you’ll be waiting a while. Let the opportunity present itself rather than manufacturing an illusory opportunity. In trading this way, you’ll make fewer decisions…but they will be better ones.
If you’re a short term trading, scratch that itch and take some profits. But don’t close the entire position. Hang onto part of it and let the strong stock rest. It’s no different than letting that great accountant take a sick day once in a while. When he’s got the sniffles, give him time to recover. Most times, he will. And then you’re back to making money!
See you in the forum.
TWIN PILLARS OF RISK MANAGEMENT COURSE
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