A simple suggestion that will improve your investing and trading results
A trader recently asked me what was the best way to increase his profits. This is a daunting question, and I am in the process of writing a book to answer this question more fully. Better security selection is the most obvious solution, but the execution of trades will likely have the most impact on trade results.
The first thing I would suggest is that instead of looking at a trade as one buy and then one sell, traders plan to enter and exit each trade with multiple buys and sells. Rather than buying at price X and selling at price Y, think of a trade as a developing relationship that will grow and change depending on how the stock behaves and general market conditions.
One of the most common complaints from traders is that their carefully selected stocks always seem to drop immediately. The ideal entry point turns out not to be so perfect. The emotions surrounding a trade suddenly change when the stock doesn’t immediately behave as we had hoped. Even though conditions are just as good or better, these initial entry points stimulate our emotions about trading.
When it comes time to take profits, we can be sure that our timing will turn out to be less than precise. We will sell too early or too late about 95% of the time and will often miss out on substantial profits.
The single buy and sell approach assumes a level of precision that simply does not exist in the market. It sounds good to say that I will buy at the 50 day simple moving average or the exact point where a gap is closed. It’s logical and easy to execute, but it rarely works. If it were that simple, we would just program our computers and our living room on our yacht.
The best approach is to exploit the vagueness of the market and use the inevitable volatility to arrive at better overall entry and exit points. The dynamics of a trade change a bit if you expect your entry point to be far from perfect. It’s very stimulating when you start to look forward to the opportunity to buy even lower after your initial entry rather than focusing on your bad timing. Adopting this mindset relieves some of the time pressure. You can put a stock on your screen and then watch for the opportunity to improve your entry points and build position. You can increase or decrease the average. It does not matter. The important thing is that you work in the trade and develop an idea of ââhow the stock works.
One of the important benefits of this approach is that it helps you cultivate patience. You have the luxury of time when you make a series of entries and exits. Too often a trader will go into too large a trade too fast and then suffer a rapid loss when the stock does not rise as expected. The one-stop buying and selling approach is a recipe for impatience. When you plan to work in a business with multiple buys and sells over a period of time, you have to be more patient and let things go.
There are many other considerations when using a multiple buy and sell approach for trade management. The best way to start is to experiment. The next time you identify a stock that you would like to buy, make a plan to divide the entry into three or four separate entries over a specific period of time. See how this approach changes the way you think, your strategies and your emotions.
Stocks will never do exactly what we hope they will. The best way to handle this is to develop a trading system that embraces imperfection.
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