'Trading is a process of observing the market's action until such a time you can find and form trading ideas and get involved.'**
Tuesday, November 1, 2011
Patience Is A Trader's Virtue
Although the best investors and traders understand the importance of patience, it is one of the most difficult skills to learn as an investor and trader.
Dennis Gartman, a successful trader and publisher of The Gartman Letter has this to say about the value of patience: "Proper patience is needed throughout the lifecycle of the trade, at entry, while holding and exit." (To read more about Gartman, see Financial Wisdom From Three Wise Men.)
Waiting for Your Entry PointYou have done your homework and have identified the entry point for a promising stock. Now you are waiting in anticipation for the price to reach your entry point. Instead of pulling back, the price lunges upward. You panic, entering an order above your planned entry point in a rush to make sure you don't miss the trade. By doing this, you give up some of your potential profit, but, more importantly, you actually violate the rules that caused you to enter the trade in the first place.
If you've ever let your emotions rule the day, you know that it can often lead to disappointing returns. In fact, impatient investors who violate their discipline may be headed down the path to ruin. Following a predetermined set of rules keeps the emotional side of trading and investing at bay. (To read more about emotional investing, see When Fear And Greed Take Over and Master Your Trading Mindtraps.)
Fishing for a Winner
Patient investing is similar to fishing. There are many fish in the lake and it isn't necessary to catch every fish that swims by in order to be successful. In fact, it's only necessary to catch those few that bite and fill up your net (or that meet your trading criteria).
It is important to remember that there are always many trading opportunities in the market, even in a tough stock market, so the difficulty is not so much in finding trading opportunities, but making sure the opportunities fit your trading rules. It is vital that you concern yourself with getting good entry points and making sure you have defined exit points along with stop losses without having to get in on every trade. If the stock doesn't want to bite, or it fails meet your criteria, then don't worry about it. Be patient. There will likely be another fish, or opportunity, right around the corner. (For related reading, see The Basics Of Order Entry.)
If you find that you have lost control and entered a stock before its time, it is usually best to exit the trade and wait for it to develop based on your predefined rules and not on your emotions. Take the costs associated with the trade as a lesson, learn from it and move on.
Waiting for the right entry point is an essential characteristic of every successful trader. If you find yourself tempted to enter an order before its time, step away and go over the reasons you selected the entry point once more. Then remind yourself that following your discipline will contribute to your success. (For related reading, see Trading Psychology And Discipline and Momentum Trading With Discipline.)
Give the Position Time to DevelopOne of the stocks you have been following hits your entry point and you pull the trigger. After entering the trade, you enter a good-till-canceled bracketed order with your target and trailing stop, which define where you will take profit and where you will take a loss. Now you wait for the expected move to happen. As you watch the trade develop, it starts to move into a profitable position.
According to the original plan, this stock still has more room to run until it hits your defined target. But before you take the quick gain, the trade retreats and falls below your original entry point, but fails to hit your trailing stop. You panic and sell, generating a small loss. Just after you exit the trade, the price moves up again and reaches your target, only now you are out of the trade. Sound familiar? It turns out that in some cases, your well-thought-out plan will be right, and you'll let a fear of a loss get in the way of the trade proceeding as expected.
Rest assured, this is a common trait among many traders. Exhibiting patience with a good trade setup is a difficult task. It requires confidence in your research and in your system. While no one is infallible, the best traders trust their discipline to make them successful. They do not waver from their trailing stop methodology by letting the trade play out. If it incurs a loss, they capture all the relevant information to assess what went right and what went wrong. If their discipline needs to change, then so be it. But whatever you do, do not let your emotion take control - it will inevitably leads to losses.
That said, keep in mind that losses are part of trading. It is your discipline along with good entry points, trailing stops and exit targets that lead to consistent profits and keep you from incurring unwarranted losses. Stay patient and let your process go to work. If you are tempted to exit a trade prematurely, step away and go over the reasons why you originally set your stops and targets. Then remind yourself that it is discipline that makes a great trader.
Knowing When to Sell a Position There are times when you follow your discipline faithfully, but despite your patience, the price of your stock barely moves. You have been patient and followed the rules - now what do you do?
In most cases, it is best to go back and re-examine your analysis of the trade. Take a fresh look and try to find what has changed. If something is different, does your new analysis change the original reason for entering the trade? If the rationale for the trade has changed, does your analysis call for you to avoid the stock at this price? If you should not be in the stock, then sell it immediately. On the other hand, if your analysis indicates that this stock meets all of your criteria to own and the entry point is very close then it makes sense to continue to hold your position.
In many cases, the price of your stock will approach your target, and being patient will work out well for you. Now comes the time when you need to close out your position. You can continue to be patient, waiting until the price hits your target or your trailing stop,or you can tighten up your stop to ensure that you capture a profit on the trade. In either case, it is time to reward your patience with a profitable trade.
While there is a little more discretion provided to selling, make sure that you make changes to targets and stops based on some pre-determined criteria. For example, you may decide that when a trade gets half-way between the entry and the target, you'll adjust the stop to the entry price.
SummaryIn summary, so much of trading is psychological, making patience a great virtue for investors. Exhibiting patience when entering a trade and having patience while a trade develops are integral parts to successful trading and investing. However, allowing patience to turn into stubbornness is something you must always guard against; consistently exiting a trade according to predefined criteria is one of the best methods of improving your success as a trader. .
Dennis Gartman, a successful trader and publisher of The Gartman Letter has this to say about the value of patience: "Proper patience is needed throughout the lifecycle of the trade, at entry, while holding and exit." (To read more about Gartman, see Financial Wisdom From Three Wise Men.)
Waiting for Your Entry PointYou have done your homework and have identified the entry point for a promising stock. Now you are waiting in anticipation for the price to reach your entry point. Instead of pulling back, the price lunges upward. You panic, entering an order above your planned entry point in a rush to make sure you don't miss the trade. By doing this, you give up some of your potential profit, but, more importantly, you actually violate the rules that caused you to enter the trade in the first place.
If you've ever let your emotions rule the day, you know that it can often lead to disappointing returns. In fact, impatient investors who violate their discipline may be headed down the path to ruin. Following a predetermined set of rules keeps the emotional side of trading and investing at bay. (To read more about emotional investing, see When Fear And Greed Take Over and Master Your Trading Mindtraps.)
Fishing for a Winner
Patient investing is similar to fishing. There are many fish in the lake and it isn't necessary to catch every fish that swims by in order to be successful. In fact, it's only necessary to catch those few that bite and fill up your net (or that meet your trading criteria).
It is important to remember that there are always many trading opportunities in the market, even in a tough stock market, so the difficulty is not so much in finding trading opportunities, but making sure the opportunities fit your trading rules. It is vital that you concern yourself with getting good entry points and making sure you have defined exit points along with stop losses without having to get in on every trade. If the stock doesn't want to bite, or it fails meet your criteria, then don't worry about it. Be patient. There will likely be another fish, or opportunity, right around the corner. (For related reading, see The Basics Of Order Entry.)
If you find that you have lost control and entered a stock before its time, it is usually best to exit the trade and wait for it to develop based on your predefined rules and not on your emotions. Take the costs associated with the trade as a lesson, learn from it and move on.
Waiting for the right entry point is an essential characteristic of every successful trader. If you find yourself tempted to enter an order before its time, step away and go over the reasons you selected the entry point once more. Then remind yourself that following your discipline will contribute to your success. (For related reading, see Trading Psychology And Discipline and Momentum Trading With Discipline.)
Give the Position Time to DevelopOne of the stocks you have been following hits your entry point and you pull the trigger. After entering the trade, you enter a good-till-canceled bracketed order with your target and trailing stop, which define where you will take profit and where you will take a loss. Now you wait for the expected move to happen. As you watch the trade develop, it starts to move into a profitable position.
According to the original plan, this stock still has more room to run until it hits your defined target. But before you take the quick gain, the trade retreats and falls below your original entry point, but fails to hit your trailing stop. You panic and sell, generating a small loss. Just after you exit the trade, the price moves up again and reaches your target, only now you are out of the trade. Sound familiar? It turns out that in some cases, your well-thought-out plan will be right, and you'll let a fear of a loss get in the way of the trade proceeding as expected.
Rest assured, this is a common trait among many traders. Exhibiting patience with a good trade setup is a difficult task. It requires confidence in your research and in your system. While no one is infallible, the best traders trust their discipline to make them successful. They do not waver from their trailing stop methodology by letting the trade play out. If it incurs a loss, they capture all the relevant information to assess what went right and what went wrong. If their discipline needs to change, then so be it. But whatever you do, do not let your emotion take control - it will inevitably leads to losses.
That said, keep in mind that losses are part of trading. It is your discipline along with good entry points, trailing stops and exit targets that lead to consistent profits and keep you from incurring unwarranted losses. Stay patient and let your process go to work. If you are tempted to exit a trade prematurely, step away and go over the reasons why you originally set your stops and targets. Then remind yourself that it is discipline that makes a great trader.
Knowing When to Sell a Position There are times when you follow your discipline faithfully, but despite your patience, the price of your stock barely moves. You have been patient and followed the rules - now what do you do?
In most cases, it is best to go back and re-examine your analysis of the trade. Take a fresh look and try to find what has changed. If something is different, does your new analysis change the original reason for entering the trade? If the rationale for the trade has changed, does your analysis call for you to avoid the stock at this price? If you should not be in the stock, then sell it immediately. On the other hand, if your analysis indicates that this stock meets all of your criteria to own and the entry point is very close then it makes sense to continue to hold your position.
In many cases, the price of your stock will approach your target, and being patient will work out well for you. Now comes the time when you need to close out your position. You can continue to be patient, waiting until the price hits your target or your trailing stop,or you can tighten up your stop to ensure that you capture a profit on the trade. In either case, it is time to reward your patience with a profitable trade.
While there is a little more discretion provided to selling, make sure that you make changes to targets and stops based on some pre-determined criteria. For example, you may decide that when a trade gets half-way between the entry and the target, you'll adjust the stop to the entry price.
SummaryIn summary, so much of trading is psychological, making patience a great virtue for investors. Exhibiting patience when entering a trade and having patience while a trade develops are integral parts to successful trading and investing. However, allowing patience to turn into stubbornness is something you must always guard against; consistently exiting a trade according to predefined criteria is one of the best methods of improving your success as a trader. .
by Hans Wagner
As a long time investor, Hans Wagner was able to retire at 55 by following a disciplined process using sound investment principles. After his children and their friends graduated from college, Hans began helping them to invest in the stock market. Soon, friends and acquaintances also began to seek advice, so Hans created a website, Trading Online Markets, which provides information on investing topics, along with sample portfolios.Read more: http://www.investopedia.com/articles/pf/07/patient_investor.asp#ixzz1cS8UzIun
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