Bonus – lesson 13 Market Secrets

/Bonus – lesson 13 Market Secrets

What if the market “Gaps Up” when you have a buy order placed?

            Let’s assume that you want to buy a stock if the price breaks through the $1.00 level and that the price has closed at say 98 cents. There is some good overnight news and the price opens at $1.11 the next day. You were expecting to pay about $1.01, what will you do? What will your broker do in this situation, whether a tradition broker or an internet broker. Better to think about this before it happens.

What if the market “Gaps Up” when you already own the stock?

As a general rule I tend to view this situation as a “windfall profit” and will often sell immediately.

What if the market “Gaps Down?”

There is no doubt that at some stage during your trading career you will be struck with a situation where the price of a stock opens far lower than than the previous close. You need to have a set of rules for these occasions.

What if I get a “Partial Fill”

Another frequent situation is when you order a parcel of shares in a company and only get a part of that order filled. Again, you need to consider a set of rules for this situation.

When I strike this situation I tend to leave my order in the market for three days, if the order is not completed in this time I will cancel the balance of the purchase and sell the stock that was purchased. I can then start again with a clean slate.

What if my stop is hit only to see prices reverse and continue upwards?

The most frustrating aspect of trading is getting stopped out of a trade, then seeing the trend continue upwards. Usually when this happens, traders give up using a stop as they “clearly don’t work”. Get used to the fact that in this market, nothing works all the time. A stop is necessary in preserving your capital. This issue is not that you got stopped out, it is the fact that you did not get back into the stock when the trend resumed. You need a clear set of re-entry rules.

 

“A bit of psychology”

 

  1. Re-entry:

I was once blamed for losing a client about $15,000. The truth of the matter is that when the client bought his stock (his choice) he asked me where he should place his stop loss. I suggested a figure which he accepted. (His choice) A little later he was stopped out at a loss. So far so good! The client was happy to have sold.

  1. Some months later he looked at the stock price and it had risen dramatically in price. The client had not repurchased the stock and had no re-entry rules so the blame for a $15,000 loss was laid on me..

Take responsibility for your actions, never blame others, all decisions are ultimately yours and yours alone, if you can’t accept that, then don’t ask for advice and probably trading is not for you.

  1. Hiding from the truth.
    1. So many “uneducated” investors bought into the second tranche of Telstra and watched prices go above $9.00. Years later when Telstra had fallen below $3.00, they all told me they were happy as Telstra paid a great dividend.

How does an annual dividend of around 6%, make up for the 66% capital loss?

    1. A client had bought a stock at $7.00. It rose over a period of about 3 years to a high of $21.00 and was trading at $14.00 when he asked what I thought of the stock. My response was, “Well the price is in decline, I would not like to own them.” The client then told me he was not worried as he was still 100% in front.

My response was: “No you are not 100% in front, you have lost 33% of your gain!”

  1. Is this a good time to enter “the market”
    1. Forget about the market!  If you are a newcomer to trading stocks you should realize that if you choose the right stocks at the right time then “the market” direction is irrelevant.

You make money by buying and selling individual stocks, not some attempt to predict market direction.