Mats Bengtsson

Buying in favorite stocks should be done with caution

Mats Bengtsson mib over the years

Are you likely to jump in too early in your favorites?

Let us take the example of an "almost" signal in your favorite stock, for example a company like Volvo. You are looking at it, and you see a pattern that really seems like a coming up move. You look at your system, which has not yet triggered, but will trigger if the stock moves only 3 more points upwards. You know that the system that is close to triggering is a profitable one, and you have seen many good bursts in this specific stock the last 12 months.

  • Are you waiting for the signal, or are you buying in advance?

Liking a stock might lead you to buy to early. That might lead you to trade something else than the planned strategy.

You feel the stock is safe, it has gone so well before. If you would wait until your system triggers, you would be losing some of the climb compared to buying right now. You are familiar with the company of Volvo, and you have heard some positive news lately, including a (couple of weeks old) rumor of a merger, and a recommendation to buy the stock only two days ago. You do not want to miss that interesting race so you enter the stock a little early. 

Trying to guess the exact turning point is going to lower your trading systems profitability, at least if the system you trade is a working system.

The stock goes down, your system never got to the trigger point, and your stop loss rule takes you out of the losing trade. Your loss is due to you acting on old knowledge, both on Volvo as a stock as well as on an old rumor and an already known buy recommendation. That rumor is already discounted into the current stock price, most traders have heard it and seen the recommendation. Your action was not taken on your carefully designed system, it was based on a hunch. This might be your personal style of trading, and it might work well if the market is currently in an up trend on a whole, but the profitability of your trading strategy as such will decrease.

Headlines

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...

About me Mats Bengtsson | Mats Bengtsson Site Map | Privacy Policy | Contact me | | | ©2003 Mats Bengtsson