Chasing The High Flyer Of The Day - Don't Do It!!
I am not a big fan of chasing the "hottest" play of the day. Too
many traders feel they have to be in the "big one", the one that
went to the moon, etc., etc. I never felt that way when I was
trading and still don't. If you look at recent history, we have
seen some, if not all, of the biggest loses reported on those
"hotties".
There are any number of stocks out there that have unique
circumstances surrounding them. When news breaks about those
stocks, they are sent up or down with incredible volume, making
huge price swings. It is not unusual to see these movers make
five or six dollar moves for a total swing of ten to twelve
dollars. In the case of a Google [GOOG] or similar stocks, those
swings could be much, much wider.
I'm not saying you should avoid these plays all together. Yet,
sometimes it is better to wait until they settle down a bit
before you make that leap of faith.
There are literally hundreds of stocks out there that, on any
given day, will give you a much better opportunity to make a
decent profit with one tenth the risk of trying to get in an out
of these mania plays. But all too often, too many traders feel
they have to be all over the trade of the day that everyone is
going to be talking about tomorrow. Unfortunately, a lot of
those talking about the play are going to be talking about being
stuck in it because they got in at the high end of one those
huge swings. Now they are buried in the stock because they
failed to use DTM: Decisive Trade Management (Read: Traders,
Defend Against the Dreaded Death Spiral
http://www.traderaide.com/Selected_Articles/Articles_on_daytradin
g.html).
Traders need to remember that it is not their job or goal to be
right on top everything that is happening on Wall Street or in
the markets. Nor is it their job to be right in the middle of
things like a mania stock trade triggered by the hottest news
story of the day.
Jake Berstein says if very well in his book, The Complete Day
Trader: http://www.traderaide.com/books "It is not the job of
the day trader to understand the whys and/or the wherefores of
market movement. The day trader's sole responsibilities are
these: First, to end each day "flat," that is, without any
positions Second, to make a profit, now matter how large or
small Third, to keep all losses small and manageable."
Ok, now with that said, a lot of you are still going to try to
make that trade. Here are a few suggestions that may help you
get in and out with a profit.
1) Always use limit orders. 2) Make sure you are using the
fastest broker/trading platform you can get. 3) Always use limit
orders. 4) Enter with one half the normal lot size you usually
trade with. Five hundred shares if you usually trade with one
thousand share lots, one thousand share lots if you usually
trade with two, etc., etc. 5) Always use limit orders. 6) Always
have a stop loss in mind. 7) Always use limit orders. 8) Be
ready to average if the stock turns against you or cut and run.
The half lot entry gives you room to average or keeps the loss
minimal if you feel you have to cut your losses. 9) Did I
mention to always use limit orders?
10) Do not use more then ten to twenty percent of your capital
to enter the trade. Even twenty percent may be too high if you
are inclined to average.
Last piece of advice about making this trade... Don't do it!!!
Happy trading!
No permission is needed to reproduce an unedited copy of this
article as long the About The Author tag is left in tact and hot
links included. Questions and comments can be sent to Floyd at
floyd@TraderAide.com.