Having a plan and sticking to it is key to trading success. That sounds very simple in theory, but it is much harder in practice. We always will have to deal with feelings and emotions that push us to act in a way that may not be in our best interest.
When we enter a new trade, there will always be some doubts and uncertainty. If it doesn't work immediately we are inclined to call it a mistake, take a quick loss and move on to the next trade. "We will make it up on the next one" we tell ourselves as we churn our accounts with a series of small losses.
Quite often the trade will end up working as was initially planned but impatience and nervousness has caused us to move on and to miss the very move that we had correctly anticipated.
To deal with this very common phenomenon, we must change the way we think and feel about the trade. Instead of focusing on the fact that the stock didn't immediately do what we wanted it to do, we need to reframe that behavior in our mind as a positive.
How do we do that? Look to enter the trade not in a single buy but in two or three or more buys. Rather than focus on precisely timing an entry point, take advantage of the inevitable volatility and use price weakness as an opportunity. If conditions remain the same, a slight pullback in price isn't a negative. It is a positive that allows us to use our capital more efficiently.
When you plan on buying your initial position in two pieces it changes your emotional framework and the way you view a trade. You may even find yourself rooting for weakness instead of dreading the possibility that the stock may not go straight up.
If the trade does work immediately, you can pay up as momentum builds. Many trading gurus advise that you should only average up rather than average down. That is a very good idea if you never planned to enter on an incremental basis in the first place. Averaging down on weakness when you never planned to is the sort if impulsiveness that leads to poor trading.
The two-step buy process has a number of benefits.
- It prevents over-precision and gets you in a trade faster. Too often hesitation proves costly. You have to have skin in the game if you are going to win.
- It helps you gain a feel for the stock movement. Nothing beats having money on the line if you want to track a stock. Watching the price action will help you develop your level of conviction.
- It decreases risk, as you have to lose if conditions change before your second buy.
The biggest obstacle to the two-step buy for many small traders is having sufficient capital. If you are not buying enough shares the spread and the transaction costs will matter to some degree but it is precisely these traders who are often too quick to act when stocks make random moves.
A two-step, or multiple-step buy is an easy change to make and you will find that it has a significant impact on the way you view a trade. Experiment and see how it works for you.
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