Sharing No. 2b

Now to carry on my previous post. To have a profitable trade, we of course need to buy low and sell high. Therefore, other than putting in the hard work to monitor the market and the possible stocks to buy, we need to decide on the entry strategy, the exit strategy, and consider all the “what if” scenarios first. This is because things can happen very quickly after you enter a trade, plus you will more or less be emotionally entangled with the trade, leading to the inability to analyze the current situation logically. Any inability to think properly and act quickly during emergencies will result in grave consequences – losing trades.

So that’s why a very strong mentality and discipline is required throughout the trade. I cannot emphasize or elaborate more on this part. Those who have traded before and witnessed their prices stuck or dive will agree with me about the need to have strong mentality and discipline throughout the trades.

I had attended a seminar before, and vaguely remember the lecturer sharing a finding with us. He showed us the breakdown on the importance of the components to a trade. In exact, the entry strategy is only 20% of importance to the trade; the exit strategy takes up 30%, and the trader’s psychology reigns with 50%.

I shall talk about strategizing the entry first. It is quite simple. After all the hard work in reading up research/annual reports, monitoring the share price behavior (depending which kind of analysis you believe in – fundamental or technical. I will touch on this again next time), you decide on an ideal price to buy at. Quantity of shares is another thing to decide. This will be dependent on: (1) how many shares you want / can afford, and (2) your investment horizon to be long or short (linked to your exit strategy). If you are buying for the sake of keeping for long-term gains, then it is okay to buy a little. But if you are trying to trade an uptrend, you better enter in batches of at least 5 lots. That’s because we want to break-even/profit within the shortest possible time and exit the positions before the market turns against us.

You might be thinking why is this the most simple task after all the tedious preparation work? A good entry strategy does its part to help. But the truth is, there are times whereby our entry strategies went wrong, yet we can still work out to either minimize the losses, break-even, or even end up with some profits. Just that extra care and effort have to be put in to minimize any misjudgments again.

I shall leave the exit strategy and more about the trader’s psychology till the next session. I apologize for being slow and naggy.

Note: Kindly read my first post on my disclaimer. Thank you.