Bill Fitzpatrick, you need to “Know Everything.” Before you buy a single share, before you purchase that investment property, you need to know everything there is to know that might influence that investment. Otherwise it’s a fool’s gambit.
You need to know the company behind the stock, its financial health, and any events that might be taking place, such as reporting earnings. You need to have an acute and tacit knowledge of the industry, sector and market conditions that will likely influence investor sentiment. You must know how to analyze the fundamentals of this company, as well as the fundamentals of the market and industry it belongs to. You need to be a skilled chartist, and be able to perform technical analysis of the stock and markets to understand resistance and support levels, price/volume momentum, contrarian indicators, patterns, and much more.
Believe it or not most investors go long or short on a stock based on their feeling that it is likely to go their way after they purchase that stock. And if it doesn’t go their way, many investors will hold that position, stubborn in the beliefe that it will come around, or they’ll double-down to try and make up for a loss.
Let’s be honest, there are some people in this world that have extraordinary capabilities that allow them to see things that others simply cannot, these people are called savants. Savants are learned, distinguished professionals that have earned their spot through hard work and innate brilliance, then there are the idiot savant like rain man, who are mostly good at just remembering stuff, not very good at analyzing and predicting. Then there’s Marilyn Vos Savant, she’s just brilliant and a looker to boot!
So, the one piece of advice that I would impart onto you before making any trading or investment decision, the mainstay of my philosophy, that would be, know everything. Once you know everything about that stock, then you need to develop a plan, a strategy for entering into the trade, and a strategy for managing it while you are a holder, and a strategy for exiting the trade. This process is not stagnant either, it a free flowing, more artful than mechanical. You might do well to read The Art of War, by Sun Tzu to gain a full appreciation, as many a business men and investors have found applicable wisdom in it. Investing is not unlike what the general must do in preparation for battle. And like battle, you never know what the enemy (market forces) is going to do, so in all likelihood, your plan will change. This means that you must have a strategy the is adaptable.
I’ll finish this post with a look at what a trade plan looks like and a definition of the key parts. Every trade you make should have the following components:
- Entry – the price you should try to get within a well defined range.
- Target – the price you have determined to be the upside potential to be.
- Stop – the price you should sell at if it falls below the Entry.
- Beta – a factor (low, medium, high) that assesses the chance that the stock will achieve the Target price
- Risk:Reward – the ratio of the amount of money you put at risk to the potential profit
There’s a whole lot that goes into determining each of these components to a trade. Some of that can be determined by objective analysis, reading charts and determining support and resistance levels. Other parts are determined by your tolerance and capacity for risk, and your risk management strategy. Overarching all these factors are your general trading or investing philosophy, and finally your trading plan. What’s a trading plan? Well that’s a topic for another post. But let’s just say it’s like a business plan.
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