Buying Stocks and the Importance of Correct Timing
An investor can find and research the best stock on the market, one with huge potential but if the general market indices are negative, it will most likely be the wrong time to buy. A stock with tremendous accelerating earnings, rising sales, an up-trending chart pattern and a strong industry group may sound excellent to buy but will mean absolutely nothing if the market is positioned to move in the opposite direction of your expectations. As soon as a stock is purchased, the time comes for an investor to make a decision to hold or to sell. If the position shows a profit, hold as your judgment is correct. If the position shows a loss, cut it quickly and don't rationalize the situation before it doubles in size. Timing will play an important role in determining if you are right or wrong.
Losers must be cut quickly, long before they materialize into enormous financial disasters. They company and stock may not be a loser but rather your timing may be premature to a strong movement, forcing you to sell on a pullback. After a stock is cut from your portfolio, the transaction must be forgotten about and eliminated from your subconscious mind and/or emotional bank. The trade must be studied to capture the true essence of your mistake but the specific security involved must be blocked from any sentimental attachments, allowing you to consider reinstating the position at a higher level. This repurchase may take place immediately or well into the future but the important fact is that you were wrong with the timing on the initial position. The timing, also known as the 'M' in CANSLIM by William O'Neil, may have been wrong even though all fundamental and technical criteria related to the individual stock seemed to be perfect.
A quote from the great Gerald Loeb:"Cutting losses is the one and only rule of the markets that can be taught with the assurance that it is always the correct thing to do."
The wisdom shared by Loeb is easier said than done. Humans like to take profits and hate taking losses or admitting that they were wrong. Pride and ego distorts the clear thinking process that every investor must posses when following clear cut rules that provides insurance to their cash stake. Even tougher, humans refuse to repurchase anything at a higher price that they sold it previously. As Loeb states, only logic, reason, information and experience can be listened to if failure is to be avoided.
In conclusion, we must understand that certain situations are only applicable during specific times. Buying leading stocks during a down trend is a sure way to multiple losses that are cut quickly. Shorting stocks during a raging bull is another sure way to financial disaster and margin calls. Don't get discouraged if you take a few small losses consecutively as this is your rules telling you to stay out of the market at this time. The timing may be off even though the stock and research is favorable. Why would you swim upstream to reach your destination if you could jump in a boat and row downstream with the current another day? Before you ever start to immerse yourself into researching a stock to purchase, make sure you know the exact environment of the market and determine if it coincides with your objective. If it doesn't, get ready to get slaughtered, especially if you don't follow strict rules to cut all losses quickly.
Chris is the founder and president of MarketStockWatch. com, an internet community that teaches you how to invest your money with solid rules. We don't stop at just showing you our daily and weekly screens, we teach you how to make you own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.