How many times have you placed an order to buy a stock and immediately sat and watched as the darned thing falls apart in front of you?! A few we’d bet because it has happened to all of us at one point or another. The real difference is what you do about it.
Unless you are so rich that losing money doesn’t hurt you, we would venture a guess and say that you generally do a little homework before you place your hard earned money in a stock. Well, if you have taken a recommendation, done your homework and decided that the ABC stock is a good buy, but the minute you buy it, it starts falling, you have to do some quick decision making.
First, how is the health of the overall market? As you know it is the ‘tone’ of the overall market that determines on a day to day basis if stocks are going to rise or fall. In other words, if the BSE is down 100 points from the open, unless ABC had some big news, it is probably in the toilet too. So, before a total panic, look at the health of the market first.
Okay, the market is fine, the BSE is up 350 points but the stock you bought for 50 is now at 48 and still sinking. Now what? Next, did it gap up 5 bucks from yesterday? In other words, did you buy at the morning’s high and now it is just “closing the gap?”
This is why we say “don’t buy the opening gap” folks, often it is the very high of the day and never gets back there.
Okay, the market tone is good and we didn’t buy at the morning high, now what? This is the tough part. If all our research and homework says ABC is a good buy, but the exchange starts to sell it off, we have found it is best to hop back out and take your loss rather than ‘hoping’ it back up. In other words, never go against the market. Remember the old adage “don’t fight the tape?” Well that means no matter how good something sounds, if the market doesn’t want it, it isn’t going up friends. In times like that it is often best to set your stop and obey it. If you get stopped out, sure it could rebound and fly for a ton, but it may have just saved you from a nasty beating.
Keep yourself aware of market manipulation
More times than not a stock that looks good and has a lot going for it, gets some very special ‘manipulation’ from the market makers. Their job is to make money and they know full well what’s hot and what’s not. If you play this game long enough you will see some of the oddest moves you could imagine and all of them are intended to get your money! So, sometimes when we have a good stock that is going completely the wrong way on a good day, it has a lot to do with ‘where the big guys’ want the price on that day. You will often find that selling back out and ‘re-buying’ some right before the close will reward you the next day.
There are times when you simply made a bad move. Maybe you hopped on a high flyer right at the very top, or maybe the stock you just bought gets a mid day downgrade and falls like a rock. But, one of the most important aspects of trading is getting a good ‘entry’, so, if you enter something and its falling on you, don’t wait around too long to see where the falling stops, get back out quickly. There is a big difference there. For instance, let’s say we buy ABC at 50 and it ends the day at 52. Now the next day it pulls back to 51.25, should we dump? Probably not, it is just clearing its throat. But, if we buy something at 50 and ten minutes later its 48.50, we didn’t get such a great entry price did we? No, and we don’t know when it will stop either. We wouldn’t let a situation like that get out of hand, because if we hold it and it ends the day at 47, we have to have a darn nice day the next day, just to break even.
The bottom line is that we need to assess the best possible entry period on an issue so that we get some profit right away.
That way we can ‘live with’ a bit of a pull back and still be in a winning position. History has shown us that if we buy something and immediately start losing on it, we probably could have picked a much better entry price and will bail out quickly with a small loss versus riding it down. We will expand on ‘entering’ a stock in another issue.
