This column was originally published on RealMoney on Feb. 24 at 10:54 a.m. EST. It's being republished as a bonus for TheStreet.com readers.
Wednesday's column on the overlooked challenges facing aspiring traders generated quite a few insightful emails from readers. One really stood out:
But speaking as someone who has been out of work for the last 3 out of 4 years and has had to make his money by trading stocks, I would say the biggest key to making money in this market is to never chase stocks and always avoid the big loss. I accomplish this by never investing a whole lot of money in any one stock. However, I do like to buy a whole bunch of stocks in a sector. I dollar-cost average down by buying more and more stocks in a given sector. I sell them off one at a time as they go up. Of course, there are always special situations which one gets by watching the tape every day. Reutersundefined and Sherwin-Williams (SHW) are on sale today.
This reader makes several key points about achieving investing and trading success.
- Take the best entry. If you missed the trade, you missed it. Don't get to the party late. It's not any fun when others have partied their way to profits and you're left holding only the bill.
Avoid the big loss. Nothing feels worse than watching an entire year's worth of gains vaporized by one undisciplined trade.
Don't put all your eggs in one basket. It still can blow up, no matter how closely you watch that basket.
Be sector-specific. Emphasize those sectors that are attracting money and diversify within that sector.
Scale out as the stocks become too hot.
Look for emotional overreactions in the market and calmly take the other side.
Let's look at those two bargains that the reader mentioned, as well as some other reader picks.
Sherwin-Williams got hit hard on Wednesday, taking a 20% haircut. Thursday's decline to $37.50 flushed out the rest of the panicked bulls. Notice how the open and close were both around $42. The intraday trading range was about 10% of the price, but afternoon buying pressure overcame the selling and the stock closed near the top of the range. Now the path of least resistance is actually higher. I'd be a buyer at this level. I'd also use a trailing stop in case the plaintiffs' lawyers start moving in for the kill. As the tobacco lawsuits start winding down, it looks like the lead-in-paint lawsuits will heat up.
Reuters is a thinly traded stock, so don't get sloppy. Unlike Sherwin-Williams, which sold off throughout a two-day period, Reuters simply gapped down and is holding steady. Because of that, the battle is still going on between the bulls and bears. I'd wait for the stock to trade above Thursday's high before bottom-fishing, and I'd use Thursday's low as a stop-loss level.
A reader asks if
is a buy here. I believe it is. The bears sold the stock hard over the past month, but Apple has been moving higher over the past two weeks -- not dramatically, but definitely higher. At the same time, the stochastics are nearing the oversold level. The last two times the stochastics fell to the 20 level, the subsequent advance was dramatic.
I wouldn't be inclined to wait for another stochastics dip to the 20 level. The last two times the stochastics fell that low, Apple just didn't have the market's attention the way it currently does.
The stock began to sell off in early January. Why? Because most folks would rather pay taxes on their Apple profits in 2007 than 2006, so they waited until January to sell. This is a technical breakdown on the stock of a solid company. Carpe diem!
could be putting in a top, or it could be consolidating. I would err on a bullish bias until Motorola falls below $20, a lower low. Stochastics indicate an opportune buy point as they begin to move higher again. The last couple of times the stochastics have been this low on Motorola have turned out to be excellent buying opportunities.
I've highlighted the last two bottoms on this weekly chart of
. The September low extended far below the lower Bollinger Band, and also broke $40. The recent low barely remained above the lower Bollinger Band -- a higher relative (Bollinger Band) low. The price also held above $40 -- a higher absolute (price) low. This combination of higher lows often signals higher future prices. As long as $40 holds as support, I'd stay long.
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 the 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;
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