At times, it is a struggle to come up with a new and specific subject for an article every week. As I was thinking about what I should write this weekend, it occurred to me that trading is a part of life and in life we see ourselves do many things without a conscious intention.
Supermarkets are great examples that use our natural tendencies to add to their sales. As we go to a check-out, look around at all the last minute things we can buy just by reaching out a hand. Tabloids with enticing headlines abound. Have you ever been tempted to read that article about the boy who was abducted by aliens only to return with an astonishingly high IQ or the article about the celebrity who is having affairs around the world. Even if that doesn't get us to buy, there are many who pick up the paper just to glance at the tantalizing article. So, too, are there tempting bars of candy and the all so necessary breath mint.
As we know, these displays set us up for the "impulse" buy. We may not need it, but the suggestion may lead us to buy it. Have you ever noticed that in your trading or investing? A friend or a broker might suggest a stock, for example, and we just buy it. We do no fundamental analysis and certainly may fail to look at a chart to see whether there is an opportune entry or, probably even more importantly, whether there is a handy exit. While an impulse buy of a candy bar may not be terribly devastating, an impulse buy of stock might be.
Just like at the supermarket, if we think about things and do even a little analysis, we may pass on the stock as we would on the tabloid. We might see that the stock price is pretty far from a logical exit or that the reward to risk potential may not be what we ordinarily plan.
Generally, the wiser supermarket shopper makes a list and doesn't go shopping on an empty stomach. They have a plan and the plan has eliminated much of the impulse buying since a growling stomach isn't suggesting additions to the cart and the list has set pre-determined choices based upon the shoppers needs.
Perhaps the trader would be wise to follow some of those cues. Having a plan in the first place would help eliminate candidates that fail to meet the trader's requirements. As an example, a trader who is interested in entering a bullish trade might demand that any potential entry be above the 50 day moving average and he might discipline himself to understand that he need not be invested in bullish positions when a market is decidedly bearish. I've found that most of my selection process with stock and options is one of elimination rather than selection and only when I no longer find a reason to eliminate am I ready to add to the portfolio.
I hope you have a wonderful weekend.
by Bill Kraft, Editor
Copyright 2009, Makin' Hay, Inc.
All Rights Reserved
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