Mirriam MacWilliams – Chief Trainer / Wealth Mentors
We talked about what makes a good stock, and how to identify good stocks, and which are the key areas to consider. Now the key question is how do you know, when to enter, and when to exit.
Excellent. For that, we are going to have to use a little bit of technical analysis.
Because we may find a perfectly good stock, however we actually may buy that stock at the perfectly wrong time. That can happen. You buy the stock and it starts to go down. You wonder what happened.
We need to understand how the market works. How does it work : Share prices are going up because it’s being bought. So stock prices can hit a certain price, and actually start continue to go higher because more people are buying.
The stock can also reach a price where selling begins. As soon as selling begins, the stock starts to go down.
So, what I am looking to do, is wait for the stock to go up, and then buy high and sell higher. As soon as the stock starts to pull back, I want to then be able to sell my position.
I already know before, I enter my trade, at what point I want to get out. I need to be able to understand a little bit of technical analysis – being able to look at a chart.
Because I am trying to base a decision, based on what the stock has done in the past.
So, you’re saying go in when you see the share prices rising, and then go out when it starts falling. But what about the rationale that some people who say that, I’ll go in when it bottoms out, because what comes up, goes down, and what goes down, will go up. So eventually, it will go up and I will make a profit.
That’s the way a lot of people think. If the stock is 50 dollars, why do I have to wait till it goes to 52 or 53 to buy. It’s attractive now at this price.
However when do you know that the stock has made a bottom? The only way that you know it made a bottom is in the future. I myself am not comfortable buying stocks that are going down, because I saw stocks go from 200 dollars down to 2 dollars.
As the stock starts to go down, I know that people think that, well I just buy more and average my costs down.
However remember the concept of how the stock market works. Share prices are going down because the stock is being sold.
Do you want to be the one buying when everyone is selling it ? I want to be buying it, when everyone else is buying it. Because we continue, buyers will continue to fuel higher prices, sellers will continue to fuel lower prices.
Not good to try to cherry-pick bottom, or the top of the stocks. Let’s catch the middle.
So don’t try to be smart, and try to predict when it bottoms out or when it peaks. But what happens when I go in there, and it has sort of peak out, and it starts to show it’s bottoming out. I have made so much, and I am starting to lose a little. Do I stay on, or do I quickly let it go?
When you enter a trade, generally my experience is, based on the way that I trade, if the trade is not going to go my way. It will not do so, maybe one two or three days. And I will say this: I have already placed what is called a stop-loss, in the computer, in the system, that will take me out of my trade, in the unlikely event that it hit my exit point.
I already have my trade fully automated, set up, so I don’t have to try to go back, and talk myself into buying, or staying, or going. I don’t have the capacity to take myself out of a trade when it goes against me.
I know that I have a tendency, after so many years of investing, becoming emotional about taking a loss. In order to eliminate the emotion associated with taking a potential loss, best to set a sell stop and leave it alone.
In the unlikely event you get stop out, it’s what you want. Because that means that price of entry, could actually continue to see lower prices. So let that the lower prices complete, let buying come in, and see if you can go back in at a later time.
It seems to me, that one should have a clear agenda of how one will go about playing with the stock market, because one goes in, because one tends to be emotional.
Definitely, that’s why there is a need for a trading plan. A trading plan is designed to have you sit down and have you make certain calculations, at a time when the market is closed.
That’s the best time to make these trading decisions, when the market is not in full swing, and you are seeing all these fluctuations.
Best when the market is closed, set aside maybe 20 minutes in the evening, look at the potential trades, make your calculations and see what your risk and your reward is.
And when I see I have the potential to gain a whole lot more than what I may potentially lose, and the stock is fundamentally strong, then I will look to buy the stock.
How do I catch myself, then, from being an emotional investor – how do I catch myself, so I can still stay objective and smart, when it comes to investing?
The key to that is to fully automate your trade. Not only are you going to have a target, a profit target. you will place a live working order called a sell stop, that will take you out with a profit, you will also have a stop loss, which will take you out with a potential loss.
And not even, as the stock starts going in your direction, you are adjusting your stop loss, so that you are now capturing profit, and locking in your initial investment.
Fully automate your trade, do not monitor the trade all night long. If you are monitoring it, for investment purposes, more than 20 minutes, you are watching it too much. That will create emotions.
So the two key points here are: when to enter and exit the trade.
The opportunity to have the target to the upside, to be able to determine what my potential might be in the trade, and to fully automate my trade, don’t stay up all night.
For those who are not really keen on the stock market, we have options trading coming up. What are we going to talk about?
That’s my favourite subject. We will talk about how a very small investment capital can actually grow. It is how I really started to find that my wealth was generated in the stock market.