Of all the traits that make for good traders, probably the most important is patience. You have to be patient when looking for entry points, you have to be patient while waiting for a trade to work and you have to be patient to deal with volatility.
Patience is an easy concept in theory, but it can be extremely difficult in practice. What sort of things can we do to cultivate patience into our trading?
The biggest enemy to patience is emotions. We make a new buy and the stock doesn't act the way we would like, so we dump it -- although nothing material has really changed. It is easy to let outside factors impact our thinking about the market. I've often found myself cutting a position or not buying something because of vague worries about the overall market. My patience is undermined simply because my mind is too active worrying about other issues.
Probably the easiest way to cultivate patience is to move incrementally. When we quickly jump into a stock with a substantial buy, our emotions are much more likely to kick in -- especially if we aren't immediately rewarded for our decisions. It is nice to have a stock move immediately, but most of the time, it isn't predictive of the longer term success of a trade.
When you start off with a smaller buy and plan to add to it as the stock develops over time, you will force yourself to think on a different timeframe. You may actually find that you are pleased If the stock doesn't immediately go up. You can add more shares and improve your cost basis.
I've recently been trading a small biotechnology stock, Aurinia Pharmaceuticals (AUPH) , which is developing a treatment for Lupus. The stock has consistently failed to gain sustained momentum despite good news. The technical pattern is still quite promising, but it is easy to be discouraged by the inability of the stock to generate momentum -- even though technical and fundamental conditions are positive.
If I had jumped into this stock aggressively at an early point, I probably would have dumped it when it failed to move as quickly as I had hoped. However, I have been trading it incrementally -- and instead of being frustrated and emotionally driven when it doesn't gain momentum, I use the opportunity to increase my position a little. I'm able to be patient because I'm not worried that it doesn't move immediately and it may actually work out better if I can continue to build it slowly.
Trading in an incremental manner can be particularly important in dealing with earnings reports. Betting on the outcome of a report is very risky. We have seen this during the current earnings season as Amazon (AMZN) and Alphabet (GOOGL) have rewarded those that have made earnings bets, while stocks like Starbucks (SBUX) , IBM (IBM) and Intel (INTC) have punished those that have rolled the dice.
There isn't any way to completely mitigate the uncertainty of buying a stock in front of earnings, but if you keep positions smaller with a plan to trade it further after the news, you can handle the risk much better. Some of the best trades develop after a stock makes a big move on an earnings report. Once earnings are released, you are no longer betting on an uncertain event. Instead you are trading the emotional reaction to the event. That can be very advantageous if you view the situation objectively and not with any major baggage.
Traders too often think of a trade as being a single buy point and a single sell point. It is all or nothing -- and when you think that way you will have less patience. When you think of a trade as a situation that develops over time and won't necessarily move in a straight line, you can patiently position yourself for maximum profits.
If you want to cultivate more patience in your trading, the best way to do it is to move in small increments over a longer period of time. You will be surprised how approaching a stock in this manner changes the way that you view it.