3) Being Right or Making Money – When to Buy (3/3)

When we are waiting for the trend to confirm…and not trading blindly all the time…we are actually waiting for the lowest risk period to trade or enter the market….now that we have settled buy at the right time…what about the right price?

Have you often heard people mentioning price confirmation? Or wait for confirmation? This should be familiar to chart patterns traders…always wait for confirmation…else, the pending pattern is null and void.

“eh siao lian eh…this one I know….buy low sell high…. Very easy…. U tell me good time to buy? I tell what what is a good and cheap price to buy…confirm right?…”

Wrong.

Too many of us take the price of stocks like it is a material product…buy when there is a sale…cheap then buy…buy low sell high! Too high dun buy!

We often like to queue lower, hopefully the price will come down and hit us….come to think of it, isnt it quite a contradictory action? Look, you buy a counter because you feel/hope/analysed that it will go up…and yet at the point of buying….you are thinking that it will come down?

If you think that Arsenal FC will win a match…just bet win. Why narrow the odds for yourself by betting that Arsenal will lose 2 goals and come back up to win 3-2?

You get what I mean?

There is a way of buying cheap….only when you have thoroughly analysed the valuation, the financials, and the potential of the company…and feel that the current price is traded at much of a discount to it’s true valuation…so you buy. Then….you have to wait patiently for the market to realise that this stock is undervalued and pick it up… Could be 1mth, 1yr, 1 decade…

Buy and hold supporters or long term investors often are presented with a super long term chart of how equities tend to go up in the long term…check out the slide below.

Stadion Funds 80yrs MA

Greg Morris, Stadion Funds

Anyway…most of us when we think cheap…we are not thinking of the valuation (most of us)…most of us are thinking of the relative term of cheap….last week $2.00 now drop to $1.00 …. Cheap! Can buy! Moreover this one is Temasek related counter…sure wont die one….

(Remember your primary school science experiment? Put left hand into cold pail of water, right hand in a hot pail of water. Hold for 1 minute and then put both hands into a room temperature water. Left hand feels hot and right feels cold….)

Those who bought at $2.00 will feel $1.00 is cheap…those who have bought at even lower will think its high….

Let me tell you…when the trend is down…most counters will go down….cheap will get cheaper…. Trend is like a tide…when it’s approaching high tide…almost all the ships will rise….

Price confirmation in general, for trend trading is the price moving in the direction of the prevalent trend. Yes, buy on the way up dude! I buy on the uptick. I advise my clients to do so. All, yes, all think that I am mad when I tell them, “this period is positive…but for this counter…better wait for it to come up then buy….”

Remember, most stocks will follow the prevalent trend…what if the counter you have chosen doesnot follow the trend? Price confirmation will help reduce the risk that you have chosen a black light counter…Yes…risk management again…

I did not know then what I learned later, what made me fifteen years later, wait two long weeks and see a stock on which I was very bullish go up thirty points before I felt that it was safe to buy it. I was broke and was trying to get back, and so I waited. That was in 1915.
Jesse Livermore

We have gone through 1) what to buy (for me liquid counters & close correlation with market, regardless of beta), 2) position sizing (how much to buy, depends on logical stop loss level and maximum drawdown), and 3) when to buy (upon establishment of trend and price confirmation).

Next up is when to sell, in terms of getting stopped out. It is similar like whipsaw…but not exactly the same.

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