As an investor, you’ve done your research. You’ve laid out your plans. All your drivers line up perfectly. But then some outside force comes in and changes everything. What do you do?
You stick to your guns.
Case in point: a recent day where everything was going great for me. I had two open put positions and the market was down sharply on the day. Then at 3:30 p.m., just 30 minutes before the closing bell, CNBC came out with a report about a proposed bailout for a troubled bond insurer. The report, which wasn’t yet confirmed, sent the Dow soaring over 200 points in the last half-hour of trading. The two puts I was sitting on both dropped as their stocks jumped in value, even though neither of the companies stood to benefit from the bailout plan.
But I didn’t panic. You see, the drivers that got me into those trades were still in place. So I kept the positions open.
The next trading day, both stocks moved back down. One dropped sharply and the other moderately, despite the fact that the overall market was higher. Had I panicked and gotten out of my two puts, I would have taken losses of over 50 percent on both of them. As it turned out, I still took a loss of 50 percent on one, but the other one came back and I was able to close it at a 50 percent gain.
Keep your emotions in check. Base your buying and selling decisions on solid analysis. If you are in a trade and the drivers that got you into the trade are still in place, be disciplined and don’t react to the news. Your wallet will thank you.
[Ed. Note: Rick Pendergraft is a professional trader and market analyst. In Rick's new investment service, he reveals how you can make hundreds - even thousands - of dollars just for playing a simple game of "guess the pattern." Learn more here.]
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