“I learned quickly not to do anything unless you know what you are doing. I learned that it is better to do nothing and wait until you get a concept so right and a price so right, that even if you are wrong, it is not going to hurt you.” These are the sound words of well renowned investor Jim Rogers on the fact that it is essential to get a full and accurate understanding of a stock before setting up a trade.
He describes how “hysteria” can be a driver of the price and it is essential to know that the price is being driven up by hype and as a result the price artificially inflates. Rogers points out that a stock can see its price plummet just as fast as it rose when it is based on hysteria. Therefore trading on a stock that is priced on hysteria is a risky business as it is operating outside of standard and being driven by the masses.
Jack Schwager defines an “investor” as someone who only goes long as compared to a “trader” who will go long or short. However Rogers refers to himself as an investor even though he goes both long and short as his differential is based on the fact that he sees traders as being more inclined to trade in a rash manner and without proper planning or execution.
Rogers advocates that it is essential to take the time to fully understand the market conditions and the background to the stock price. This contrasts to the classic image of the trader who will only consider a few indicators and then decide to execute the trade. This is what fuels the generalized opinion that traders fly by the seat of their pants.
The fact is that trading a hyped up stock increases risk, so knowing that it is higher risk allows for better risk management, a target for all traders and investors. Rogers states that the best thing to do with a hyped up stock is to trade out any positions when it is at its hyped up high and then buy it back when the price drops back down again. As far as general trading goes, he states that you should always know what it is that you need to do and why, and then to execute the plan.
So in the end it all comes down to planning to ensure that you win. The plan should be built on knowing what the influences are on the price and whether there are likely to be any external factors that will put undue pressure over the coming days or weeks.
This information shores up your feel for the trade and so adds more weight to the plan and ultimately reduces your risk. It also provides greater confidence as you know you have a solid plan and so you are more likely to follow it which will likely deliver profits and the self-confidence to carry on in such a manner.
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