Mark Minervini has written three fantastic trading books that I highly recommend. I’ve been going back through the last two chapters in Trade Like A Stock Market Wizard and found a few passages that highlight some of the things I’ve been talking about recently: raising cash when the market gets unstable and only trading when proper setups show up.
“Undisciplined players looking for “action” always show up at the poker tables. The stock market is no different except that most stock market investors are even less disciplined than most poker players. The Achilles’ heel of most gamblers and speculators is the desire to play every hand, a common human weakness that allows impatience to override good judgment.”
One concept that new traders have a hard time with (I know I did before I gained experience) is knowing when to turn it off. Especially when you have a good winning streak the natural inclination is to want to keep it going and even increase your activity and position size. The problem though is the market goes back and forth between trending and consolidating and moving sideways. In the choppy periods a trend following approach like Stage Analysis can get chopped up, and a string of losses can occur if you try and trade sub-optimal setups instead of patiently waiting for the next big opportunity.
“In the stock market, you have the luxury of being able to stay on the sidelines, free of charge, observing and waiting for the most opportune moment to wager. You get to see the market’s “cards” before you bet, free of charge. This is a wonderful advantage, yet few exploit it.”
This is exactly the idea of waiting until you see the Stage 2 breakout show up in the charts, and then pouncing on it. If you don’t see any good potential Stage 2 breakouts or continuation buys, then there’s nothing to do. It’s as simple as that.
And if you get upset about missing a trade, don’t because another trade will setup at some point in the future, probably sooner than you think. The worst thing you can do is chase a trade you missed and then have that capital tied up in a potential loss while another good opportunity shows up.
“You don’t have to involve yourself in every market movement. In fact, you should not attempt to. Be an exacting opportunist. Be selective and pick your entry spots very carefully. Wait until the probabilities are stacked in your favor before you act. With patience and discipline, you can profit from market opponents who are less disciplined and less capable than you are. While you do nothing, less skilled opponents are laying the groundwork for your success, and you get to wait and watch for free. What a deal!”
We know in Stage Analysis that the Stage 1 bases and Stage 3 tops lay the groundwork for the next up or down trending move in the markets. If you find yourself buying too early in Stage 1 before a real breakout occurs you are doing what Minervini is talking about in the final quote above. The probabilities are not in your favor until you remain patient and wait for the ideal buy point.
I highly recommend all three of Mark Minervini’s books. I find myself going back through them from time to time since there’s a lot of good material in them covering all aspects of trading.
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