Trading and Investing

Everyone suffers from the habit of trying to create a opportunities where none exists.  Look back over your market experience and ask yourself how many times you’ve avoided a stellar stock because you couldn’t accept its reality, or how many times you’ve convinced yourself that a volatile, sideways trending stock was bound to break through to the upside only to take a loss when it continued to trend sideways or fell.

We all do it, maybe because its in our nature to be pessimistic of the ‘obvious’ trends, or maybe its because we’ve been brainwashed into thinking that the only big gains to be made in the market are realized when you find a big move before it happens.  Whatever the cause, the root of the problem is that we often trade stocks in the wrong direction because we convince ourselves that what goes up must come down, or vice-versa.

The point of this post is to convince you to stop this technique and embrace a simpler, safer one.  We should all be looking for stocks that have performed well over days, weeks, months, and have a reason to continue performing well.  Rather than buy a sideways trending stock, buy an upward trending stock.  Don’t assume that a falling stock is bound for a reversal - instead, convince yourself that an upward trending stock will probably keep trending up… at least in the short term.  Go for the easy trade, not the hard one.  The easy one is the one that is obvious and has a lot of supporting evidence.

To better illustrate this point (as simple as it is) let me present two examples.

First, a typical hard trade:  RIMM has been trending up for years now.  Its split multiple times, its price to earnings ratio is absurd.  All signals indicate that it just can’t sustain this kind of upward movement.  You convince yourself that a reversal is imminent and you buy Puts.  Wait, what??  Puts?? Why would you buy puts?  The stock has been skyrocketing.  The stock is surrounded by buzz and hype.  In order for this trade to win, either a huge amount of market sentiment jeu de poker a telechargerjeu de streap pokerregles poker holdemjouer video pokerforum poker en ligneguide poker en ligneworld poker tournamentapprendre a jouer au pokervideo poker onlinetelecharger poker holdtournoi de poker gratuitesregles poker pdfpoker gratuites macparty pokerles règles de jeu pokermalette jeu de pokerwinamax pokeryahoo france jeuxplay poker onlineplay 7 card stud onlinejeux gratuites poker texastournoi poker onlinesalle de poker en lignetournoi texas holdempoker en ligne argent virtueltelecharger gratuitement jeu de pokerjeux frtricher poker en lignestrip pokerjouer au poker parisjeu poker gratuites a telechargertelecharger poker starsregles du poker texasjeu poker tour gratuitesjeux poker en lignepocker texas holdemplay seven card studstreap poker onlinestrip poker en ligne gratuitesjouer au poker sans telechargertexas holdem rulesgagner poker en ligneregles stud pokerjeu de poker en francaisworld poker series tournamentjeux poker en ligne gratuitesapprendre poker gratuitesapprendre a jouer o pokerpoker totalement gratuitestelecharger jeux poker gratuites has to change or something really bad has to happen.  You’re trading pessimism in an obviously hopeful, euphoric environment.  That’s a huge stretch.

Second, an easy trade:  RIMM has been trending up for years now.  Its split multiple times, its price to earnings ration is absurd.  Another split is coming up.  Trade it.  All evidence is indicating that, irrational or not, the stock is going up and will continue to do so (at least in the short term).  Make a short, 10-20 day trade on the stock, trying to capitalize on the trend line that the stock appears to be following.  It’s even better if you wait for a short term pull back to get in, then you can try to maximize your profits.

In the first example, we were trying to capitalize on the unsubstantiated, small chance that something bad will happen or that market sentiment will suddenly change.   In the second, we were just riding the tide.  While the potential upside for the first trade is undoubtedly much larger, the potential down side is as well.  We’re investors and traders, not gamblers.

So, how do we build a strategy around this?  Keep up with stocks that are splitting in the next couple months.  Disregard anything that doesn’t have an apparent trend on both the weekly and daily charts.  Establish a trend line and look for short term pullbacks or bounces to use as entry points.  Usually this type of trade can be successfully performed over the course of 5 to 10 days.  Only look to make as much as the trend indicates you should be able to.  A good stock to look at as an example of this technique is MedcoHealth Systems (MHS).  The stock has a strong weekly and daily trend, its moving up despite the general market trend, and its moving into a split.

Happy Trading.