Your entry or price is by far the most important factor when buying a stock, you can buy the best stock in the world however if you just bought the all time high you’re not going to make money. On the flip side you could buy the worst stock in the market, but if you get the best price it could be a home run. For now let's focus on the former because you’re not looking to buy the best piece of shit out there, you’re looking to buy the best company trading at the best price.
Below are two examples, CAT and GE. Be honest would you rather buy CAT at $115 that is up over 100% in the last year or GE that seems like a deal that's down around 25% in the same time?
Now before we show you which was the correct answer, let's take a step back. If you are new to trading and have never bought a stock before then most of you will tend to shop for stocks as you do when shopping for clothes. You see a jacket that you like and see the price tag for $500, most know that in time stores have to get rid of their merchandise and if patient enough that jacket will eventually be on sale. You come back a week later and it’s 10% off, no dice, two weeks later 20% off, ahh still holding out, a month later 35% off, ok that’s fair however you can still wait, then it’s the end of winter and the jacket is 50%, what a steal! You grab it, yet it’s 70 degrees and that goose down parka is as useless as having condoms on a deserted island.
On the flip side I want you to take a minute and think of your most expensive purchase, maybe it was a home, or a watch, or maybe even a car. Now this major purchase you tend to hold for some time and what does it typically do? It usually holds its value or sometimes even appreciates (with the exception of your car). This is the type of shopping you want to do when shopping for stocks. Just like that shirt that you got a deal on, a month later it is worthless! You spent $50 on it and could not sell it for more than $10 if your life depended on it. Yet that $500,000 home has value, that $30,000 Rolex made of solid gold has value, or even if you have plunked down $20,000 to get your girlfriend or wife a Hermes Birkin bag, that also has perceived value and more importantly demand (Birkin has appreciated at an average of 10% a year for the last 30 years). Now let's see how your shopping for stocks panned out.
If you selected CAT you were correct- it increased by over 50%
If you bought what seemed to be expensive, it increased by another 50% in less than a year, just as most expensive items tend to do. What's expensive tends to get more expensive until it doesn't. Now on the flip side the stock on sale, is even more on sale.
GE was a deal a year ago, down 25% (and most would think that was the deal) yet it went on sale even more and fell another 36% from that entry. What's cheap tends to get even cheaper until it doesn't.
Most who are new to the markets are traders on the way up and investors on the way down. Do the opposite.
This is why we focus on buying stocks that are near major levels of resistance on their weekly charts, yes weekly charts, not the last 5 min bar that closed. Focus on the big picture first, weekly levels, then look closer at the daily level to find your entry first. Most new traders do the complete opposite, they shop for losers then look at the smallest time frame possible for an entry. Focus on charts in the top right near highs, keep it simple. Now we can’t just blindly buy highs and be right that's why we always have a stop for when we are wrong. Let's move onto the next lesson “The Stop”.
Winners focus on the win, losers focus on the winner.