Although we ascribe to the view that a share price is ‘never too high to buy’ (providing all of the signals are positive) one of our trading ‘rules’ is not to ‘chase’ a share price. By that we mean that even though we may have identified a potentially profitable trade we will forgo that trade if the share price rises quickly and substantially above our intended entry price.
And, yesterday, International Power (ipr) provided a classic example of why we have this rule.
We had identified the stock as a potential ‘buy’ at 328p with an initial stop-loss at 311p and a target of 370p. Here is the chart –
We checked the current price just before we sent the email as an ‘Alert’ buy (on Monday morning) but saw the price rising hard and already at 342p – way above our normal 2% slippage allowance. We immediately cancelled the email alert in accordance with our rule procedure of not ‘chasing’ a fast moving share price. Here is what then happened later that day –
The merger talks had been cancelled and so the price just fell off the cliff. Had we proceeded with this trade we, and you, would have been stopped out the same day and would have had to nurse a nasty loss. As it is, our ‘rule’ (which results from many years of experience of this sort of behaviour) kept us out and stood us in good stead.
And today (Tuesday) the price has been as low as 303p and the stock is looking a bit sorry for itself.
There is always another (good) trade round the corner!
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