| Even traders want to be trendy when they buy | | | | What went wrong was that you didn`t let the |
| stocks. Many traders make trades because of | | | | stock come to you. Instead, you chased it as its |
| public opinion, not because the trade itself makes | | | | price rose, knowing perfectly well that, following |
| sense. When a particular stock seems popular, | | | | the stock split trend, it would probably pull back |
| they rush in so they don`t feel they`ve missed an | | | | before running up again. It was more likely to pull |
| opportunity. | | | | back than it was to continue on an uninterrupted |
| As a result they end up buying at a price point | | | | run to $25, and you knew that if you bought at |
| where the trade can`t possibly work out. You | | | | $18 or higher you were probably paying too |
| should always avoid the emotion of the "hot" | | | | much. You ignored what you knew was more |
| stock. | | | | likely in favor of what might happen. |
| Here`s an example of what not to do when you | | | | You should have given the stock a chance to |
| buy stocks: Let`s say you`ve been following a | | | | come to you, at a price you felt was reasonable. |
| particular stock which is in a "hot" sector, and it | | | | If the stock had pulled a surprise and never |
| just announced a stock split. The stock is now at | | | | gotten down to where you thought it would, that |
| $18, and you calculate it could get to $25 or more | | | | would be okay. There were many other stocks |
| by the time of the split. The market is currently | | | | to trade, and some of them would have come |
| bullish, and it looks like a great trade. | | | | down to your price. You didn`t have to own this |
| The problem is that the stock has been rising for | | | | particular stock. |
| the past four days. It started at $12, but you | | | | What was the right way to play this particular |
| didn`t notice it until it hit $18, and it`s still rising. The | | | | scenario? When the market is bullish, it`s very |
| stock split is a month away, and you know it`s | | | | likely for a stock to rise when a split is announced, |
| likely to fall in price somewhat between now and | | | | drift down after a few days` rally, and then begin |
| the split. Still, everyone is talking about this stock. | | | | to rise again a week or so before the split. If |
| What if it continues to rise and becomes the next | | | | that`s the trend and there`s no solid reason to |
| blockbuster? You become afraid that if you don`t | | | | think the stock will rise immediately, wait a few |
| make a trade you`ll miss a great opportunity. | | | | days for the stock to drift down and stabilize |
| (And besides, you want to be able to tell people | | | | before buying it. If you had done so in this case, |
| that you hold a position in this stock, because it | | | | you could have bought it at $16.50 and then sold |
| makes you seem smart.) So you buy 1,000 | | | | it for $20.50 for a $4.00 profit on the entire 1,000 |
| shares at $18.50. | | | | shares. |
| During the next two weeks, the stock goes to | | | | If you had a solid reason to think the stock might |
| $19, then levels off, loses momentum, and drifts | | | | continue to rally, you could have bought half the |
| down to $17. Then a couple of leading NASDAQ | | | | total number of shares you wanted at a price |
| companies give earnings warnings, the market | | | | that might have turned out to be too high, and |
| drops, and the stock slides to $15, triggering the | | | | waited for a lower price to buy the other half. If |
| stop you`d set at $16 on half your holdings. The | | | | it had turned out to be too high, it would only |
| stock trades in that range for a week, and then | | | | have reduced your profit. (No stock goes up or |
| begins to rise slightly going into the split. Your plan | | | | down in a straight line. Wait for a pullback before |
| is to sell a day or two after the split. The stock | | | | buying.) |
| rises a little beyond $20.50 by the second day | | | | There is a good way and a bad way to buy |
| after the split, and then the volume dries up and | | | | stocks or trade a "hot" stock. The good way |
| you sell it for a $2 profit. But since you stopped | | | | requires discipline and careful market evaluation. |
| out of half your shares at $16, you lost $2.50 per | | | | The bad way is to trade from your feelings. As |
| share on that half, with a net loss of $.50 on 500 | | | | you can see from this example, it`s always more |
| shares. What went wrong? | | | | profitable to trade the good way. |