This is a golden rule that every trader should stick to. Little rules like this keep you on track to success, and keeps the emotions at bay. Setting up a trading plan and sticking to it is the key. Let’s get strait to the point. Before you pull the trigger, the two things you should know is your entry price, and exit price. A stock will go up, and a stock may go down. Your job is to clearly define what you will do when either of those two scenarios happen. Simple as that. Yet even the most experience traders will do otherwise.
Entry points can be determined a thousand different ways. For the sake of simplicity, our entry points are breakouts from consolidation, resistance, or new highs. We play for a major trend upwards of 20% or more. Often, traders are so eager to take on a trade they don’t put any thought into what they are doing. Emotion takes them over and their delusions force them to act contrary to what is actually happening in the market. Buying higher prices is a mind game. It goes against the very assumption of buying low and selling high. A beginner’s perception of the markets rule his decision making. Do what the charts tell you what to do.
Exit points can be determined by a technical breach of a trendline, and support level. Once this level is hit, you must exit. Too often traders will be hopeful at this point, waiting for a quick bounce to recover losses, or worse, “holding for the long term”. You’ll see it often when a trader becomes an investor. This usually leads to ruin. Often the stocks we trade are for capital appreciation and growth. These factors change over time. Buy and hold stocks fit a different fundamental criteria, a subject we shall gave for another day.
Selling and taking profits too early is another problem traders have. Until you get that sell signal, you hold till the trend is over. A trader with a series of losses may see a trade go green with only 7% gain, and may make the foolish decision to take a profit. Little do they realize that it’s been statistically proven that stocks that show gains, will go higher. This of course remains in the realm of trading growth stocks in a bull market. Sometimes we will see a 30% gain then an 8% correction getting stopped out of the trade. The mind seems to fixate and anchor our expectations at 30%. It’s human nature to do so. Being able to stick to a plan is easier said than done, but the discipline comes with time and experience.