Will you be able to buy a stock that recently caused you a loss?
Let us look a the scenario where you just received a buy signal in for example the company Netcom. You know that the system
signaling the buy is a trend follower with about 45% chance of being
profitable, and normally returning 5% profit within 15 days. It is important you know and trust this, since the risk is that old
knowledge of old trades will lead you to second-guessing your trade system.
The old knowledge you have of the company should not affect you
Say for example that you bought
Netcom last year, at the wrong time. You were holding the stock for almost
20 days with no profit. You sold it and did not even cover the broker cost. A couple of weeks later, the very same stock skyrocketed, leaving
you with the bitter taste of incorrect performance in your mouth.
now look at your current signal, you remember that trade, and you look at the
stock chart again. It has been climbing a lot the last 3 months, quite a lot
you notice. It has been consolidating the last week, almost not moving
upwards in price at all. The more you think of it, the more convinced you
become that the stock is not likely to take off right now. After all, it has already
climbed a lot.
Previous failed trades might lead you into a spinning wheel of new failed trades
Let us say you do not buy, and you miss the following up move. If this
happens to you once, it is likely to start to happen to you many times. What is happening
is that you let your old knowledge and feeling of failure interfere with
your belief in the system. You let your feelings and old
knowledge cloud the fact that the system giving the signal is designed to find
continuation points after consolidation periods in an upward trend.
Instead you question if the consolidation was really only a consolidation, you fear a
repeat of your previous buying experience. Most likely, your
system caught some signals indicating that the consolidation was coming to an
end, buyers starting to pay higher prices again, demand going up.
Never trade stocks without having tested your system. In fact, most trading systems are not profitable if tested over many stocks. Full story...
Do not invest in heating equipment without having compared the alternatives, not only to current situation, but also to each other. Full story...