March 31st, 2010 
Category: 
I am a swing trader; my timeline is from a few days to a few weeks. I do not have the time to day trade everyday or the patience to wait years for the stock to earn huge profits. I have mentioned a couple of “rules” in my previous posts. In fact, they are more guidelines than rules. Today I will discuss why it is important to have guidelines as part of your investment strategy.
If you are not a buy and hold long term investor, you need to keep in touch with your business partner on a daily basis. One day Mr. Market agrees to sell his securities for a premium while the next day you feel he is really looking for a buyer at any price in order to dump his worthless holdings on you. I guess you know how that feels when it appears you’re the only one left holding the bag. Dealing with a schizophrenic personality can be hard on the nerves.
Stock market prices are driven by psychology as well as by business fundamentals. Fear and greed are the two of the strongest human emotions that affect the market. It is easy to sell a stock prematurely because it dipped temporarily and fear set in. On the other hand, it is also easy to miss out on a decent gain because greed was encouraging you to hold on for more, and then the stock drops back down.
Before you take the decision to buy a stock and pull the trigger you should ask yourself questions: Why am I investing in this stock? What are the imminent catalysts that will move it in the near term? What are the risks associated with these upcoming events? Where does the sector as a whole stand? The answers will cover the business fundamentals.
Write your answers down on a paper, you might want to remind yourself of these answers if the price dips or decides to hibernate for a while. Many times people end up buying high and selling low because they buy on an impulse when the market is in euphoria and sell in a panic when the market is in the red thinking the sky is falling. A drop in stock price is not always a reason to sell. Remember that you are investing in a company and its stock may not always reflect its true value. If the company’s fundamentals haven’t changed, the stock is probably reacting to general market conditions.
Why is having a list of guidelines important? You need the framework to plan the trade and execute it with minimal psychological interference from Mr. Market. You need to shield yourself from your emotions. Mr. Market’s perceptions can change very quickly affecting your decision to buy or sell.
We know that it is profitable for us to observe a set of guidelines but we just can’t help it sometimes and ignore them. In the next series of posts, I will cover my guidelines in light of my trading activity.
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[...] good to shut out the noise and take a good look at the fundamentals. BeatingTheIndex.com has a post up about his trading guidelines; they’re well-worth taking a look at, and the same lessons [...]
[...] they deal with, and they use several skills to achieve this, such as manipulating your sense of fear & greed, establishing a position of authority, and using eye contact and touch to further manipulate your [...]
[...] Beating the Index: Trading Guidelines [...]
Whilst I do believe your current write-up is on the appropriate path there are a couple of tips i tend not to believe.
Thanks for stopping by Jim,
Please feel free to expand on those tips you do not agree with. After all learning is one of the reasons why I started this blog.