Ask any five people the best way to get to a busy metropolitan airport during rush hour and you're likely to get five completely different answers, each person claiming to have the can't fail route. Invariably there will always be one person who will direct you to take those less-traveled back roads, that only the locals know about, free of traffic, devoid of tolls, and guaranteed to get you to your flight hours ahead of schedule.
We are all trying to get somewhere and many of us are sure we know the best way to go. That is, of course, until we are hit with a massive delay and have to consider rethinking our route altogether.
As traders, there is only one chosen destination: Profit.
Of course the fastest way to get to that destination is to hold the right positions. If you are long a stock and the stock goes up, you are well on your way to your destination. The same can be said when we you are short a stock and it goes down.
However, like a carpooling mother rushing to drop a car full of kids off at school, you must know more than one way to get where you are going or else you might get stuck in a jam and not reach your destination on time. Worse still, the chaos mounts with each passing minute as the children grow restless. Your aggravation mounts as the childrens' squirms and impatient wails mash together with the curses from other drivers and the sustained blasts from their cars' horns. Such a situation can lead to frustration and helplessness, feelings common amongst traders on the losing end of a trade. You may have had excellent success trading a particular stock in the past, just like your regular route to the school may have always been fast and efficient. However, for any number of reasons you may be taking a loss in your stock on this particular day. All the while, you notice that other stocks may be making significant moves, steadily fluctuating back and forth into great areas and that other traders, either in your office or those whom you just know, have been making a lot of money trading their stocks. Meanwhile the stock you are trading pulls away from you or barely moves at all. The agony of a losing trade both depresses you and frays your nerves at the same time.
We all have a favorite way of driving to any particular place. It may not be the fastest way, or the cheapest way, or even the shortest way. But, whatever your reason (closest to home, less complicated, most gas stations), it's the route you like to stick with. Sometimes, though, your tried-and-true way to your destination just might not get you where you want to be. A horrible accident a few miles up the road, some unexpected construction, even bad weather can delay you for hours. Likewise, in the stock market, any number of factors can influence the direction of the market and can determine whether or not you will make money trading a particular stock on a particular day.
Sometimes we need to quickly realize when our favorite route is jammed up and make fast decision as to which alternate route to take. A trader must also realize when their favorite stock is not moving in their favor and quickly find alternatives in order to avoid minimal profits or worse, take a loss.
We Miss Out When We don't Look Out
It's happened to all of us at one time or another. I once sat helplessly in traffic for hours, not knowing what had caused it and with no end in sight. Meanwhile, I was late for my good friend's birthday party. Upon finally arriving at the party everyone else who was there had already settled into their niche for the night: Some outside on the back deck, keeping an eye on the beer, many involved in their own conversations off in various areas of the house, a group of friends watching the game on T.V., and others having seemed to have had more than enough to drink. Already tired, irritable, and anxious, it did not make me feel any better when a random acquaintance of mine, who just happened to live right near me, who left at roughly the same time as me, and who I subsequently did not like very much to begin with mockingly boasted that I would have been there hours earlier if I had just gone his way.
Although it took a couple of minutes, by the time I had taken off and hung up my jacket, said a few hellos, heard a funny joke, and got started on my first drink, I quickly fell into rhythm with the other guests and ended up having a fantatstic night. Trading stocks has a rhythm as well and that rhythm varies from stock to stock and in different types of markets. The more you trade, the easier it becomes to pick up the rhythms of particular stocks and you will have a better feel for when you should get in and out of a trade. When we are late getting somewhere it often takes a little while before we find our rhythm and get comfortable being where we are. But when the environment and the company is familiar to us, such as at a party amongst friends, it is much easier to settle into that rhythm. Making a bad trade at any time during the day can certainly throw you off rhythm and even make you apprehensive about getting back into the market at any other time throughout the day. There will always be opportunities to regain your rhythm and recover from a losing trade, though. The more familiar you are with the market, the more confident you will feel about rejoining the party. It is very important to approach trading with an open mind, much in the same way you would any other facet in life. If you arrive late to a party, with the narrow-minded view that your night has already been sacrificed and you brood over the fact that you were at the cruel mercy of the traffic, it might be too late before you decide to take advantage of the the other options all around you that could contribute to a great evening. Likewise, if you are too focused on your losses while trading one particular stock, you will miss out on opportunities to make other trades that might work in your favor
In order to avoid getting waylaid in the future, you must know more than one way to get where you are going, so that you can bail yourself out of a bad situation and reach your destination comfortably, happily, and on time. While this is true anytime you get into your car and hit the open road, it is especially true when trading stocks. Like a familiar and well-traveled freeway, one or two particular stocks can garner a trader immense profits. The more familiar one is with a particular stock, the more he or she can understand its trends, its volatility, its ideal areas of support and resistance; and will have a greater chance of making a successful trade. Many traders have actually made a decent living by continuously trading in and out of one or two particular stocks.
But, what does one do when their one favorite stock, their fast track to profit, suddenly does not yield returns? Just as on a busy highway, countless variables can impede your progress, stopping you dead in your tracks. Suddenly a stock on a steady bullish climb can reverse into a bearish descent. Sure as an overturned tractor trailer in the right lane can snarl a four-lane expressway for hours, a gloomy earnings report, some innovation by another company in the same sector, or an increase in taxes can halt a fast-moving stock to a complete standstill and often cause it to tumble for a loss. Without a few other stocks to fall back on, it becomes very difficult to turn a profit and you can become easily frustrated when your favorite stocks start working against you.
All Roads Lead to Profit (Make Sure You Know a Few of Them)
Some individual investors are too limited in the number of markets that they trade. They become extremely loyal to those few markets and try to find trades in them when there really might not be any to make. Trading as such can lead to tremendous loses and breed bad habits that can leave you without the leverage to make the right trades when they finally do arise. For this reason, it is important to be familiar with several stocks, anywhere from 5 to 15. Generally speaking, you should watch at least one stock from a variety of different sectors. That way, you will have a better idea of the stocks in which you can make the correct trade, rather than trying to force an incorrect trade. Even in a market that is trending one way or another as a whole, different stocks move differently throughout a trading period, based on any number of various factors facing the market. For example, energy stocks might actually decline in a bull market if a surplus in the amount of crude oil reserves is announced. Likewise, a recall on a popular new heart medication can send shockwaves through the pharmaceutical sector, even if the rest of the market remains fairly strong. In each of these cases a trader who primarily invests in a particular energy stock or a particular pharmaceutical stock would be at a loss, assuming he or she is long. But, a trader who actively trades a number of different stocks, rather than just one or two preferred stocks has the flexibility to invest more creatively and take his profits elsewhere. Therefore, a diversified, yet not too broad a list of stocks, will leave you with plenty of options for making a successful trade.
Picking the Right Kinds of Vehicles
One rule that you should always follow, especially when just getting used to the markets, is that you should look to trade stocks that move at a pace that you feel comfortable with. To this end, mid-priced stocks (those valued anywhere from $30 to $100) should be ideal. In any kind of market these stocks will often have steady and clearly defined moves, significant enough to have reliable points of entry and exit. However, they will not move so slow that you feel like your gains after a whole day were just enough to cover commissions. Likewise, they will generally not move so quickly that you have to sweat through a big move against you before the stock abruptly swings back in your favor, or just keeps sliding further away from you.
What you need on the road to profit is a reliable mode of transportation that you feel secure in. A $5 stock is like your grandfather's beat up old hatchback. It may be cheap, but it might keep breaking down and can't handle speeds over 55 miles per hour. You may get to your destination eventually, but you might waste a lot of time in the slow lane or on the shoulder of the highway while getting there. Those expensive stocks, the energy or tech stocks, for example, valued in the 100's of dollars? They are like the fancy, luxurious, European sports cars. Powerful, great to look at, and can give you a thrilling ride. But, without enough driving experience, you may find them to be too muscular to get a handle on and after shifting into gear and stepping on the gas, you might lose control and slam straight into a tree.
Think of your stock portfolio as consisting of a group of Hondas, Toyotas, and Chevrolets: Nice enough, very reliable, and likely not to give you too many problems. Maybe, after some experience you can test drive and then think about investing in some Lexuses, Mercedes Benzes, and at some point a flashy sports car. If I had to recommend either cheap slow moving stocks or the high-octane expensive stocks to a new trader, I would definitely urge caution and recommend the cheap ones. On a day trading basis, there are very few traders who trade super-expensive stocks such as Google (Nasdaq: GOOG). First of all, it costs more to trade only 100 shares of Google than it does to trade 1,000 shares of a well-known financial stock such as J.P. Morgan (NYSE: JPM). So, if you were to trade JP Morgan for example, you would have much more flexibility to trade it at higher volume, which gives you more opportunities to get out of parts of your position a few times as the stock fluctuates, giving you multiple chances to take a profit. Secondly, stocks valued in the hundreds of dollars tend to have such large moves during one trading session, that they may trade five to 10 dollars against you before going back in your favor. Many traders do not want the worries and pressures associated with trading something that moves so violently, so quickly. After enough trading experience (and some decent profits) you will someday feel confident enough to trade just about anything.
Too Much of a Good Thing can Be Just as Bad as Too Little
When frozen in an endless line of taillights on the highway, we can always take solace in knowing that there is an exit maybe a mile away that leads to an alternate route, getting us back on track and to our destination on time. If we regularly trade more than one stock, we have the piece of mind to try different routes that might easily get us to our desired destination. Following too many stocks can lead to confusion and may cause you to miss out on a good trade in one stock because you might have been too involved scanning through others. Therefore, it is never wise to follow too broad a range of stocks. However, if you can become familiar with a handful of stocks, learn their habits, and be aware of their behaviors given a market's climate, then you can know which stocks to buy, sell, and ignore on a particular day.
Should you find yourself jammed up in the stock market, take solace in knowing that there are many other routes that can help to get you on your way to the profits you are destined for.
Before you come to the conclusion that a stock that your prefer is "not working" for you, you need to seriously consider why your trades in that stock failed. In order to get a stock's rhythm you must trade it continually, and that almost certainly means that you make some losing trades in it from time to time. My father George Kaufman, who is a tremendously successful trader firmly asserts that a stock traded on Monday must also be traded on Tuesday. This is not to say that you should keep bringing yourself to slaughter against a stock that you always lose money trading. If you find that to be the case, it just might be that you are having some difficulty understanding that stock's habits and behaviors; and that might end up being one of the stocks that you should not trade. However, by repeatedly examining a few stocks closely, you will have a better idea as to where the correct areas are to get in and out of the market. That way, if you happen to make a losing trade one day, you can look over that stock's chart, identify why the trade was unsuccessful, and have a better idea of what the correct trades will be for the next day. You should encourage yourself to trade stocks in which your previous trades had failed, but only if you go about trading them with your mind atune to what the correct trades might be. In becoming familiar with a few stocks, you can then know which stocks might not be approaching ideal trading areas and you can then turn your attention to those that can earn you some profit.
Disclosure: "No Positions"