I want to just talk about entries. Here’s the deal: you have a choice to make, you can just buy a stock whenever you see it, whenever you feel like it, whenever the spirit moves you. Or you can look at a stock and say, “Okay, I’d like to buy that stock but I need to wait for the right time.” If that is your approach, and I would certainly recommend that that would be your approach, you would look at a chart like this and you would actually find very few times that were actually RIGHT to buy that stock. And you would DEFINITELY NOT look at this chart ( NASDAQ: GOOGL ) and say, “This is the time for me to buy this stock. I really like the way this is trading; I’ve got to buy this stock right now.”
By the way, whatever is on the right edge of the chart, this is all you have to work with. You can’t buy the stock down here or down here. You have got to be buying the stock or selling it, whatever you’re going to do, right where it is. All the rest of this stuff is just for reference; this is just for reference to tell you how high is high, how low is low, where is the stock?
The reason I am pointing this out is this, it has to do with Friday’s action. You can either buy a stock at the right place or you can buy the stock at the wrong place, you can chase it. Now, what is the right place? The right place to buy a stock, let’s say we are pretty aggressive here, we see this stock here ( NASDAQ: GOOGL ), we didn’t buy it here, but again, we are pretty aggressive. We want to buy the stock right here at 1203.00 but we are going to put our stop right down there. We are buying the stock here and we are going to put our stop down here; literally not even 2 percent. We are going to put it just below this level, we’re going to buy this stock. And so, boom, this is our entry and then this is our stop.
We are aggressive but at least we have got a reason for buying it. If we think the stock is going to break out here, we think this is support right down here, so if the stock falls here and we get stopped out. Well crap, we didn’t want to buy that stock anyway, we don’t want to own that stock, we’re wrong. We don’t have to keep the stop down at the 200-day moving average or the 50-day moving average or any other magical indicator that you have. We just say, “This is where I think support is and this is why: Because the stock traded down for 4 days in a row. The low on this day was 1181.48. That’s where I think the stock is going to go down to.” So if I want to, the low is 1181.48, I can even make this 1181.00, so are really snugging it up here. So we are buying the stock right here, 1.75 percent risk. The stock comes up here, we’re happy, we’re in. Now we are up 2 percent; we took 2 percent risk on the stock but we are up 2 percent so we are good to go. We are leaving the stop there, no big deal.
This is what I am talking about: You can buy here, it is aggressive but that’s right. Or you can look at this and you can chase. You can say, “Well, wait a minute, no, I am going to buy right here.” Okay, so now if you are buying here, where are going to put your stop? Are you going to put your stop here, 1200.00? I guess you could, that’s 2 percent. The point is, this is where you would have to put your stop because this is the last big low on down days. So you are buying up here and you have got your stop down here, that’s almost 4 percent as opposed to a 2 percent stop. And so then, boom, you get another nice move higher and then, wham, you get that kind of move.
What I am saying is, you can buy wrong and then wind up putting your stop up at some illogical place, where you either get stopped out or it has to be SO low that it is just an ungodly amount of risk. Or, you can buy right and put your stop at a very logical place where you know exactly what your risk is. Then when you get this kind of move down you are still good. Because even though this stock reversed you have not been stopped out even if you raised your stop to break even you have a good logical place for a stop. And you are not really playing defense, you are just looking at the stock saying, “Okay, well it made an unusual move today but it is still within my risk parameters.”
If you were not trading that way and instead you are chasing the stock, the move the stock made today has you saying, “Oh crap, I have got to get out of this stock.” It’s like you are booking a loss, and the reason you are booking a loss isn’t really because you are selling wrong, it is because you bought it wrong. So focus on your entry, entry is everything. If you have a nice smooth entry think about it as a footrace, a sprint. If you get out of the blocks fast, that’s half the race right there. If you stumble out of the blocks you are always going to play catch up, you are going to get locked up and you are never going to win the race. So focus on the best entry or none at all. If that is your criteria, you are going to have a lot more winning trades.