Monday, July 28, 2014

How To Manage An Investment Idea

It is not too much difficult to find an investment idea in market as it seems, but the real edge lies in managing that idea. This is the art where most traders fail and frustrate themselves. Let me explain it with an example, suppose, a stock is in a trading range, pushing against 160 resistance. A buying opportunity exists with a possible target of 200 and a stop below 140.

            Let me start with the assumption that this idea actually works, meaning it makes money. Assume that stock breaks out above 160, slowly moves up reaching 200 over the next 8 weeks. This is the most favorable scenario, but it does not mean that it is a wealth builder for you.

           Suppose, stock moves above 160, then a sharp and sudden dip comes in the stock market, pushing stock prices below 140. Later an equally sharp recovery takes price all the way to 200. Now, the target has been achieved, but before touching the target, your stop loss was activated. So, you were out of the trade, not participating in the forthcoming up move.

          There are many such possibilities, stock moved up after you purchased it. Then a sharp correction brought it down from 180 to 160 - your purchase price. The stock started moving aimlessly in this range for weeks. You eventually got frustrated and sold off, then just a few days after your exit, the stock took off, reaching 200 in no time.

         I have not discussed the possibility of the trade becoming a loss from the start. Surely, even this is possible.

         I hope you get the idea: Real life trading and investing is very different from imaginary trading.

        It is not enough to get a "call" for buying some share or the other. Frankly, such "Calls' are a dime a dozen and have no value at all. The real skill lies in managing your trade.

        Once you setup a stop loss, you must have the discipline to follow it. It is possible that the stock may move your way after you are stopped out. So be it.

        If you had valid reasons to exit the trade when a stock begins to move sideways, be glad that you took the right decision. If the stock moves up after you exit, so be it. You took the right decision at the right time.

        My point is: wealth building takes place with patience, discipline and acceptance of the impact of market forces. If you follow your rules, trade in small volumes, you will be able to withstand any number of whipsaws and false signals. In the final outcome, you will come out as a winner.

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