Trading Basics: Evolution of a Trader

ARE ALL ENTRY CONDITIONS MET?

If you use a system for trading, are you following the rules? Do you jump the gun and buy before your system signals an entry? Analyzing your trades can tell whether that is a good thing. Likely, it is bad for profitability.

In the review of my chart pattern trades, it is seldom that I do not wait for a breakout. However, when I try to bottom fish, I am often early. In other words, I think the stock has bottomed, so I buy only to find that I was too early by weeks or months. That can be a costly mistake. As Table 6.2 shows, I earn less by entering a trade early than if the timing is right.

Let me share a story with you. A person I will call Fred sent me a chart of XYZ (a fictitious symbol). “I am a student who has saved up a bit of money to invest and cannot pass this great opportunity by,” he wrote.

Judging by that sentence alone, do you get the feeling that he is going to get slaughtered? He is in love with the stock already and does not even own it. What happens when price goes against his belief? He is going to maintain his bullish stance because (he writes), “I know XYZ is a good buy.” He will finally throw in the towel just as the stock bottoms, costing him dearly not only in money but pride as well.

But there is something I have not told you about him. He has to wait a week or two to transfer the cash into his account. Maybe the stock will climb out of sight by then or tumble, proving his great opportunity as nothing more than novice overconfidence. ...