No Patience on Entry
25 August 2010
Anticipating a signal that never comes is common for traders monitoring the market closely and eager to get some money working. For example, a good buying opportunity arises when a stock breaks from an ascending triangle. Jumping in ahead of the breakout is not an ideal situation because the probability of success buying an ascending triangle is not as good as buying a breakout from one. What causes this mistake? I think a fear of missing out on the maximum amount of profit or the fear of too much risk in buying a stock are the two most common mistakes. Essentially, the two guiding forces of the stock market are at work here; fear and greed. By buying early, we can realize a greater profit when the stock does breakout since we will have a lower average cost. Or, by buying early we can reduce risk since a breakout followed by a pull back through our stop will result in a smaller loss as we have a lower average cost. What tends to happen, however, is that the stock does not break out when expected and instead pulls back. This either leads to an unnecessary loss or an opportunity cost of the capital being tied up while other opportunities arise.
The Solution
The simple and obvious solution is to wait for the entry signal, but there are also some things you can do to help yourself stay disciplined. Rather than watch potentially good stocks tick by tick, use an alarm feature to alert you to when they actually make the break. Watching stocks constantly is somewhat hypnotic, and I think the charts can talk you in to making a trade. However, letting the computer watch the stock may help you avoid the stock’s evil trance. Another good solution is to focus on different thoughts when considering a stock. Don’t think about potential profits, don’t think about minimizing losses. Instead, focus in on the desire to execute high probability trades. It takes time to reprogram yourself, so persevere.
Stop trying to outsmart the market. NO ONE knows exactly where it will go. 
You are watching a stock that has all the signals you look for in an opportunity. The proper point to enter comes, but you wait. You second guess the opportunity and don’t buy the stock. Or, you bid for the stock at a price that is not likely to get filled if the opportunity does pan out the way you anticipate it will. As a result, you get left behind while the market pushes the stock higher. A short while after the initial entry signal, when the stock has made a decent gain, you decide to finally enter the trade. After all, the market has proven your analysis correct, so you must be smart, and right! Not long after you enter, the stock turns south and you end up with a losing trade. If only you had bought when you first thought about it.
You are watching a stock that has all the signals you look for in an opportunity. The proper point to enter comes, but you wait. You second guess the opportunity and don’t buy the stock. Or, you bid for the stock at a price that is not likely to get filled if the opportunity does pan out the way you anticipate it will. As a result, you get left behind while the market pushes the stock higher. A short while after the initial entry signal, when the stock has made a decent gain, you decide to finally enter the trade. After all, the market has proven your analysis correct, so you must be smart, and right! Not long after you enter, the stock turns south and you end up with a losing trade. If only you had bought when you first thought about it.
