Stocks Hidden Blueprint for Profiting In Stock Trades – Entering, Holding and Exiting – Part 1

To quote that famous line from the eighties television show, The A-Team:

I love it when a plan comes together

With stock trades, I always have a plan, and so do all successful traders. Why is this so important?

First of all, having a plan means you`ve thought about why you`re making the trade in the first place. You have a compelling reason for the trade and you see that it has a good risk-to reward ratio. Without a reason for the trade and a sense of what the reward should be, there`s no way you can form a rational plan.

Second, having a plan eliminates the uncertainty that everyone has when a trade you make starts to move in the wrong direction. That uncertainty can be the source of significant losses. If you have a plan, you know exactly what to do and when you need to do it. You`ll have thought out the possible outcomes ahead of time. There`s nothing to panic about.

Third, besides minimizing the risk of panic, having a plan also minimizes other kinds of risk and maximizes reward because, by following the plan, you force yourself to act only in advantageous ways. You`ll minimize risk and maximize reward by choosing a profitable entry point, and avoiding money losing entries, holding your position safely, keeping stops set where you`ve planned to set them, and exiting profitably at an appropriate time.

In the market, every trade you make is a trade either toward losing or toward winning. And within every trade, each step, entering, holding, and exiting, also moves you toward either winning or losing. That`s why each step requires planning, attention, and discipline. I will touch on the importance of each stage of the trade in this article, and cover them all in more detail in following articles.

It helps to understand that you can`t know for sure where the best entry and exit point are, and that it doesn`t matter. Successful trading doesn’t require knowing things for certain. Instead, it requires you to be able to gauge probabilities. If you always do the things that have the highest probability of working, they should work out many more times than not.

Finding a low-risk entry point for a trade is every bit as important as finding a good trade. How can this be? You can pick the best trade in the world, but if you enter it at the wrong place, you may make no profit on it at all, and you may actually lose money.

Nobody knows, for instance, which stocks are going to make them rich in five or ten years. Many companies won`t even be around in five or ten years. Doesn`t it make sense for anyone, trader or investor, to enter a stock at a point where it has a better chance of making them money instead of losing them so much that they have to wait five years to get their initial investment back? Finding a safe entry point ensures you have the best chances of making a profitable trade.

The next part of your strategy involves keeping your position out of trouble while you hold it until you are ready to take profits. The most important part of this step involves setting stops. You must set stops on every trade. I cannot stress the importance of stops enough, and have several articles on the topic that you may want to read to get a better understanding of how necessary stops are.

Now that you`ve started to make profits on your trade, your plan should tell you when it`s time to exit. Knowing when to exit is as important as knowing when to enter. Traders who hold their stock trades too long often find that their profits have disappeared. They ended up making no money, or even incurred a loss, on what should have been a profitable trade. With planning, this will never happen to you. Once you’ve created a plan that details how you will find entry and exit points, and how you will maintain your position safely, you will be well on your way to having your stock trades ALL COME TOGETHER!

About the Author
Who Else Wants To Learn A Simple, Step-By-Step System For Generating Quick & Easy Profits, Trading Stocks? – FREE FOR A LIMITED TIME – http://www.stocktradingsystemsx.com/index.php

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Stocks Hidden Blueprint for Profiting In Stock Trades – Entering, Holding and Exiting – Part 1

Against the Top Down Approach to Picking Stocks

If you have heard fund managers talk about the way they invest, you know a great many employ a top down approach. First, they decide how much of their portfolio to allocate to stocks and how much to allocate to bonds. At this point, they may also decide upon the relative mix of foreign and domestic securities. Next, they decide upon the industries to invest in. It is not until all these decisions have been made that they actually get down to analyzing any particular securities. If you think logically about this approach for a moment, you will recognize how truly foolish it is.

A stock’s earnings yield is the inverse of its P/E ratio. So, a stock with a P/E ratio of 25 has an earnings yield of 4%, while a stock with a P/E ratio of 8 has an earnings yield of 12.5%. In this way, a low P/E stock is comparable to a high – yield bond.

Now, if these low P/E stocks had very unstable earnings or carried a great deal of debt, the spread between the long bond yield and the earnings yield of these stocks might be justified. However, many low P/E stocks actually have more stable earnings than their high multiple kin. Some do employ a great deal of debt. Still, within recent memory, one could find a stock with an earnings yield of 8 – 12%, a dividend yield of 3- 5%, and literally no debt, despite some of the lowest bond yields in half a century. This situation could only come about if investors shopped for their bonds without also considering stocks. This makes about as much sense as shopping for a van without also considering a car or truck.

All investments are ultimately cash to cash operations. As such, they should be judged by a single measure: the discounted value of their future cash flows. For this reason, a top down approach to investing is nonsensical. Starting your search by first deciding upon the form of security or the industry is like a general manager deciding upon a left handed or right handed pitcher before evaluating each individual player. In both cases, the choice is not merely hasty; it’s false. Even if pitching left handed is inherently more effective, the general manager is not comparing apples and oranges; he’s comparing pitchers. Whatever inherent advantage or disadvantage exists in a pitcher’s handedness can be reduced to an ultimate value (e.g., run value). For this reason, a pitcher’s handedness is merely one factor (among many) to be considered, not a binding choice to be made. The same is true of the form of security. It is neither more necessary nor more logical for an investor to prefer all bonds over all stocks (or all retailers over all banks) than it is for a general manager to prefer all lefties over all righties. You needn’t determine whether stocks or bonds are attractive; you need only determine whether a particular stock or bond is attractive. Likewise, you needn’t determine whether “the market” is undervalued or overvalued; you need only determine that a particular stock is undervalued.

Clearly, the most prudent approach to investing is to evaluate each individual security in relation to all others, and only to consider the form of security insofar as it affects each individual evaluation. A top down approach to investing is an unnecessary hindrance. Some very smart investors have imposed it upon themselves and overcome it; but, there is no need for you to do the same.

About the Author
Geoff Gannon writes a daily value investing blog and produces a twice weekly (half hour) value investing podcast at: http://www.gannononinvesting.com

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Against the Top Down Approach to Picking Stocks

What Stocks Are and How Stock Market Investments Work

People hear about the stock market every day. Each time the stock market hits a high, or a low, people hear about them. Daily statements are also issued about the activities of the stock market and its relevant economic implications. But what really is a stock market? What are stocks? And why is it that people want to do stock market investments?

The stock market is the marketplace where the trading of company stocks happen. These stocks may either be the securities which are listed on the stock exchange or those which are traded in a private manner. Stock market investments allow companies and private individuals to get a share of ownership in large corporations. It is also a way of gathering large sums of investment capital which is difficult to produce if the business is solely-owned. The large capital then comes from the stock market investments.

Stocks are shares of a company or business which gets on sale in the stock market. Stock market investment happens when a person buys a share of a company’s stocks that were put on sale in the stock market. For example, a businessman decides to sell his business in the stock market. Each stock market investment is represented by the person who buys his share of stocks. When this happens, any person who buys stocks in the businessman’s company will have an equal share of profits by the end of the year, and an equal vote in the company’s business decisions.

In the past, stock market investments were done by individual buyers and sellers. Through time, however, this has changed and the market participants evolved from individual investors to large corporations. This change in the activities of stock market investment has also helped to control movements in the market.

To encourage stock market investments, a business that wishes to sell its stocks to individuals and corporations could only do so if it becomes a corporation. Individual capital investors and big corporations who buy a number of shares of a business or a corporation are then called shareholders. Shareholders are the owners of the new incorporated business. Their stock market investments gave them the authority to claim ownership of the business. These people can now decide whether to privately or publicly hold their corporation.

In a privately held company, the shareholders are few and probably know one another. Their stock market investments are known to each other. The publicly held company, however, is owned by a large number of people who do stock market investments on the public stock exchange.

About the Author
Find out more about stocks and shares at http://stocksandshares.us

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What Stocks Are and How Stock Market Investments Work