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Even traders want to be trendy when they buy stocks. Many
traders make trades because of public opinion, not because the
trade itself makes sense. When a particular stock seems popular,
they rush in so they don`t feel they`ve missed an opportunity.
As a result they end up buying at a price point where the trade
can`t possibly work out. You should always avoid the emotion of
the HOT stock.
Here`s an example of what not to do when you buy stocks: Let`s
say you`ve been following a particular stock which is in a HOT
sector, and it just announced a stock split. The stock is now at
$18, and you calculate it could get to $25 or more by the time
of the split. The market is currently bullish, and it looks like
a great trade.
The problem is that the stock has been rising for the past four
days. It started at $12, but you didn`t notice it until it hit
$18, and it`s still rising. The stock split is a month away, and
you know it`s likely to fall in price somewhat between now and
the split. Still, everyone is talking about this stock. What if
it continues to rise and becomes the next blockbuster? You
become afraid that if you don`t make a trade you`ll miss a great
opportunity. (And besides, you want to be able to tell people
that you hold a position in this stock, because it makes you
seem smart.) So you buy 1,000 shares at $18.50.
During the next two weeks, the stock goes to $19, then levels
off, loses momentum, and drifts down to $17. Then a couple of
leading NASDAQ companies give earnings warnings, the market
drops, and the stock slides to $15, triggering the stop you`d
set at $16 on half your holdings. The stock trades in that range
for a week, and then begins to rise slightly going into the
split. Your plan is to sell a day or two after the split. The
stock rises a little beyond $20.50 by the second day after the
split, and then the volume dries up and you sell it for a $2
profit. But since you stopped out of half your shares at $16,
you lost $2.50 per share on that half, with a net loss of $.50
on 500 shares. What went wrong?
What went wrong was that you didn`t let the stock come to you.
Instead, you chased it as its price rose, knowing perfectly well
that, following the stock split trend, it would probably pull
back before running up again. It was more likely to pull back
than it was to continue on an uninterrupted run to $25, and you
knew that if you bought at $18 or higher you were probably
paying too much. You ignored what you knew was more likely in
favor of what might happen.
You should have given the stock a chance to come to you, at a
price you felt was reasonable. If the stock had pulled a
surprise and never gotten down to where you thought it would,
that would be okay. There were many other stocks to trade, and
some of them would have come down to your price. You didn`t have
to own this particular stock.
What was the right way to play this particular scenario? When
the market is bullish, it`s very likely for a stock to rise when
a split is announced, drift down after a few days` rally, and
then begin to rise again a week or so before the split. If
that`s the trend and there`s no solid reason to think the stock
will rise immediately, wait a few days for the stock to drift
down and stabilize before buying it. If you had done so in this
case, you could have bought it at $16.50 and then sold it for
$20.50 for a $4.00 profit on the entire 1,000 shares.
If you had a solid reason to think the stock might continue to
rally, you could have bought half the total number of shares you
wanted at a price that might have turned out to be too high, and
waited for a lower price to buy the other half. If it had turned
out to be too high, it would only have reduced your profit. (No
stock goes up or down in a straight line. Wait for a pullback
before buying.)
There is a good way and a bad way to buy stocks or trade a HOT
stock. The good way requires discipline and careful market
evaluation. The bad way is to trade from your feelings. As you
can see from this example, it`s always more profitable to trade
the good way.
About the author:
Discover BIG profits from the market by downloading your FREE
copy of David's new Ultimate Trading Systems course. http://www.ultimat
e-trading-systems.com
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