Trading's Holy Grail: Perfect Patience

One rite of passage for traders and investors alike is coming to the sad realization that no matter hard you try, no matter how many books you buy or newsletters you read, the answer to successful trading is nowhere to be found. It's easy to say, "Do your homework, look for good companies with stock selling at a discount and just hold on." The real trick is finding the good companies ... and getting the stock at a discount ... and holding on.

The problem is that patience is actually a rare virtue. We are the generation of instant gratification. Heck, we can't even spend the time to go to the store and buy CDs anymore. We just download the music online. Go see a movie? No reason to, with video on demand. So doesn't it seem like there should be a quick fix for successful trading in the market?

I think I've finally found what you're looking for, and it's pretty simple. Just reconcile these famous Wall Street quotes:

A man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains, they cannot sit tight.
-- Jesse Livermore

Asked how it was that he was so successful in the stock market, legendary financier Bernard Baruch replied, "I always sold too soon."

There you go! Learn to sit tight, but not so tight that you hold on too long. As long as you struggle with this concept, trading will remain a challenge. Master it and trading becomes easy. Good luck!

While you ponder that riddle, let's look at some stocks away from Google (GOOG - commentary - Cramer's Take). (I highlighted Google last week, noting that if a break of support occurs, $300 would be in play. It's probably in play now.)

Last month, I highlighted the S&P Small-Cap 600 iShares (IJR - commentary - Cramer's Take) using a resistance trend line as a basis for gauging the strength of the trend. Last week's advance tagged a well-established multi-year trend line. That tells me that this uptrend is healthy. Seems like this is a "sit on your hands" if you're already long, and a "buy on dips" if you're not.

RPC (RES - commentary - Cramer's Take) has been on a tear over the past few months, and shows no sign of stopping. Keep in mind that earnings are slated for the morning of Feb. 15. Do you sell too soon, or sit on your hands? Maybe the weekly chart can add some clarity.

All the Fibonacci lines in the world won't tell me when this uptrend is ending. This is an example of the reward that finds anyone who is willing to exercise patience rather than trade out of an obvious uptrend. Sit on your hands for now. Worry about selling too soon later.

Expeditors International (EXPD - commentary - Cramer's Take) has been consolidating the November breakout for the past few months. The mechanics of a post-advance consolidation work like this: After a run, the stock succumbs to profit-taking and the uptrend ends. As the stock moves sideways, the balance between supply (from profit-takers) and demand (from anxious bulls and fearful shorts) will dictate the ultimate direction of the stock. If supply outweighs demand, then the price breaks down and selling begets more selling. On the other hand, if demand soaks up all the profit-taking, then that demand must seek higher prices to absorb enough stock.

This type of reasoning has always made more sense to me than just drawing a bunch of lines and hoping the stock will honor those lines. Understand the underlying dynamics of the price patterns and you can make more informed decisions.

Here, if the price remains above last week's resistance, we will know that the immediate profit-taking has been overpowered by demand. I would put a stop right in the middle of the congestion area because, if that stop gets hit, then my thesis will be incorrect -- for the moment.

Foundry Networks (FDRY - commentary - Cramer's Take) posted earnings on Jan. 26. The stock continues to move higher. I've drawn this "W" pattern to illustrate how bottoms are formed. The last peak was in late 2004, where the bulls tired out around $14. It's taken a year for the stock to get back to that same level and turn all the buyers into winners.

As I read the price action, you would have had to buy Foundry back in April 2004 to still be upside-down in the stock. I just don't believe there are many of those guys left. So the only thing in the way of higher prices is simple profit-taking. I'd follow Livermore here and sit tight. But if the support trendline is broken, it's not too soon to sell.

Starbucks (SBUX - commentary - Cramer's Take) announces earnings after the bell today. And from the looks of this line chart, it's ready to move out of congestion. I've drawn a line chart to clear out some of the noise and look only at closing prices. See how the price action remains above the middle Bollinger Band from September through November as the stock advanced from $23 to $32? The middle Band defined support. Since then, Starbucks has been bouncing around within the entire Bollinger Band complex, with the upper Band continuing to act as resistance and the lower Band now serving as support.

Let's see what Starbucks does after earnings are announced. If the lower Band is broken, I'd probably take profits. But if the upper Band is broken, then I'd want to see the next pullback halt at the middle Band. If the middle Band once again acts as support, we'll know the stock is moving higher.

Good luck finding that Holy Grail, and be careful out there.

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Dan Fitzpatrick is a freelance writer and trading consultant who trades for his own account. His columns focus on quantitative strategies for trading and investing. Fitzpatrick has lectured throughout the U.S. on the proper use of technical analysis and options trading. At time of publication, Fitzpatrick held no position in any stocks mentioned, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.