Thursday, June 11, 2009
Retail Investors' Mistakes #3 - No Trading Plan
You know what I am referring to when I say some investors do not have a plan when entering the markets. If you buy stocks on pure hearsay, its a dangerous plan. There has to be a plan. You assess the markets, if its volatile, you trade it. If it a strong bull, you can gear up.
More importantly, the markets usually rotate among sectors, note the "good sectors" to be in. Don't just simply buy. Be careful about hot stocks, most will only hog the top volume for a few days and then fizzle out. If you are in the high risk category you can consider hot stock in the right sector, the play could be a bit longer.
A trading plan always include a cut loss level, and maybe a take profit level. I would recommend to be very strict on cut loss but on profit taking, it is better to be a bit more flexible, first rule, always let your profits run. If you keep taking profits when you gain 10%, you will never get the 30%-50% gain. If you take profits strictly at 10%, you will then have to find new hits.
Imagine a baseball player, how many home runs he can hit in a 9 innings match. One would be good, two would be fantastic. You will be asking a lot of yourself to keep picking 6 or 7 out of 10 buys to make 10% each time. Pick a winner, ride the trend. When something is making you 40%, even when they drop 5%, its still a much better gain than taking profits at 10%.
p/s photo: Kim Eun Jung & Ha Joo Yun