At ShareHunter we do tend to ‘go on a bit’ about the need to always trade in sympathy with the dominant trend of the market. There is more heartache suffered and bigger losses made from buying shares too early in the cycle than at any other time.
The problem is largely caused by the media hyping up the possible effect of a rally (and in any ‘bear’ market there are always price rallies) coupled with positive commentry from market ‘experts’.
Once these aspects are added to an investor’s natural desire not to miss out on a stock market rally (especially after a long down phase) and to get in at the lowest possible price you have a loaded gun and a potential for heartache and loss. It is far from uncommon for a share price to halve when at the bottom after a long downtrend; so easy then to lose half your capital at a stroke.
The present situation of the UK and US markets demands a considerable degree of patience. It is important not to be drawn in to buying shares too soon. Yes, you may miss out to some extent but it is better to wait and to achieve less profit per trade rather than risk so much by buying ahead of the main trend change.
Here are three current examples of the risk factor involved -
Thomas Cook Group:
Click chart to enlarge
The price has moved up strogly from the low at 120p and, by the time this started to be ‘tipped’, most people jumped in at prices ranged between 220p and 280p. But, with the heavy resistance (created by the previous highs) at the 310p level and with the fact that its index (the FTSE 100) is not yet out of its dominant downtrend this is not, in ShareHunter terms, a buy. It’s too risky. And now these investors have seen the price suffer a sudden fall back to the 220p level. It could so easily continue down to the 120p level again (we are not saying that it will!) thus causing even bigger losses. Better to have waited for all resistance to be overcome as making profitable gain is then something of a doddle.
Green King:
Click chart to enlarge
Another example of buying too soon. The resistance level pushed the price straight back down so anyone who bought at the 500p area as the rally got going will now be nursing a loss (and one that could get much bigger if the price continues back down to the 300p area.
The potential for increasing the amount of loss is very real as physchology plays an important part. Very often an investor, having made up his, or her, mind that the rally is going to continue finds it almost impossible to admit and accept that his view was wrong and so he or she is unwilling to change that view and get out. Instead the investor hangs on almost as if to prove to himself that the he was right in the first place. That can be, and often is, quite an expensive ego trip.
Patience is a vital attribute and a path to profits; trading against the dominant trend isn’t.
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