Chasing The High Flyer Of The Day – Don’t Do It!

I am not a big fan of chasing the “hottest” play of the day. Too many traders feel they have to be in the “big one”, the one that went to the moon, etc., etc. I never felt that way when I was trading and still don’t. If you look at recent history, we have seen some, if not all, of the biggest loses reported on those “hotties”.

There are any number of stocks out there that have unique circumstances surrounding them. When news breaks about those stocks, they are sent up or down with incredible volume, making huge price swings. It is not unusual to see these movers make five or six dollar moves for a total swing of ten to twelve dollars. In the case of a Google [GOOG] or similar stocks, those swings could be much, much wider.

I’m not saying you should avoid these plays all together. Yet, sometimes it is better to wait until they settle down a bit before you make that leap of faith.

There are literally hundreds of stocks out there that, on any given day, will give you a much better opportunity to make a decent profit with one tenth the risk of trying to get in an out of these mania plays. But all too often, too many traders feel they have to be all over the trade of the day that everyone is going to be talking about tomorrow. Unfortunately, a lot of those talking about the play are going to be talking about being stuck in it because they got in at the high end of one those huge swings. Now they are buried in the stock because they failed to use DTM: Decisive Trade Management (Read: Traders, Defend Against the Dreaded Death Spiral

Traders need to remember that it is not their job or goal to be right on top everything that is happening on Wall Street or in the markets. Nor is it their job to be right in the middle of things like a mania stock trade triggered by the hottest news story of the day.

Jake Berstein says if very well in his book, The Complete Day Trader:
“It is not the job of the day trader to understand the whys and/or the wherefores of market movement. The day trader’s sole responsibilities are these:
First, to end each day “flat,” that is, without any positions
Second, to make a profit, now matter how large or small
Third, to keep all losses small and manageable.”

Ok, now with that said, a lot of you are still going to try to make that trade. Here are a few suggestions that may help you get in and out with a profit.

1) Always use limit orders.

2) Make sure you are using the fastest broker/trading platform you can get.

3) Always use limit orders.

4) Enter with one half the normal lot size you usually trade with. Five hundred shares if you usually trade with one thousand share lots, one thousand share lots if you usually trade with two, etc., etc.

5) Always use limit orders.

6) Always have a stop loss in mind.

7) Always use limit orders.

8) Be ready to average if the stock turns against you or cut and run. The half lot entry gives you room to average or keeps the loss minimal if you feel you have to cut your losses.

9) Did I mention to always use limit orders?

10) Do not use more then ten to twenty percent of your capital to enter the trade. Even twenty percent may be too high if you are inclined to average.

Last piece of advice about making this trade… Don’t do it!!!

Happy trading!

No permission is needed to reproduce an unedited copy of this article as long the About The Author tag is left in tact and hot links included. Questions and comments can be sent to Floyd at [email protected].

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