Although Jesse Livermore is considered one of the greatest traders of all time, he went broke three times before age 30. He was known on Wall Street as the Boy Plunger because he would plunge in and take huge positions. When they worked, he made a fortune. When they didn't work, he was wiped out.
What was particularly frustrating for Livermore was that many of his big losing trades would have eventually worked if his timing had been different. He was in too big, too fast and couldn't stay with the position through a downturn.
Eventually, Livermore dealt with this problem of timing by developing a method he called "probing." Rather than jump right in immediately, he would probe the market by making small buys that would help him gain a sense of the price action. If he liked what he saw, he would add to the position and start to pyramid it as it moved in his favor.
He likened this approach to a military officer sending out a reconnaissance patrol to spy on the enemy and gather intelligence. The knowledge gained by this probing would allow him to attack aggressively at the right time.
The probing method has several benefits. First, it impacts emotions and psychology when you start small and keep risk limited. I often find that I will avoid a chart that at first glance seems too technically extended, but if I make a small initial buy and then watch the action, my attitude about it will shift as I follow the price action more closely and gain a sense of the stock's personality. Rather than just dismiss it as a missed trade, I am now focused on looking for an opportunity to press as the chart develops.
A good recent example of this is Applied Optoelectronics (AAOI) . The stock has moved from $23.44 to $51.50 this year and by most any measure is extended. It is easy to dismiss as a "missed trade" if you just glance at it. However, if you take a small position, watch the price action and study the story, your attitude may shift as you see that momentum is staying strong and that support levels hold. That small probing position sets you up mentally for a more aggressive position as trading opportunities develop. A foothold in the stock will make you more confident that you can find an opportunity in something you might otherwise dismiss.
Livermore had two key conditions to his probing buys. First, he made sure to determine the size he ultimately intended to hold, should the stock develop in the manner he liked. He had a plan in advance and didn't just add shares randomly. His initial probing buy would generally be about 20% of the total. The idea here is to have a plan and not be tempted to modify it as your emotions kick in as the price action develops.
This first rule goes hand in hand with the second, which is that you only add to the trade if it is acting in a positive matter. You don't try to lower your basis because you hope that the market will eventually appreciate the positive fundamentals of this stock. What you do is add to your position as the price action proves that the market is discovering the merits of the situation. That is what helps you improve your timing. You aren't trying to guess when a stock will move. You are embracing it as it moves and does what it supposed to do.
One variation that I add to the probing approach is trading part of the position with shorter timeframes. Rather than treat it as one big trade that is established incrementally, I will think of it as several trades with different time periods. This has many of the same benefits of the probing approach but helps to mitigate risk when there are some quick flips as you build a position.
It can be quite easy to let inertia set in as you seek the perfect trade. There will always be negatives and uncertainties, but if you don't put money to work, you won't have a chance to profit. Taking small initial "probing" positions forces you to act and keeps you focused on finding good opportunities. Your insight into a trade will grow quickly once you have a stake and learn its behavior. All it takes is a very small buy to turn theory into practice.