Saturday, March 16, 2013

Know when to commit your cash

A trend follower does not want his capital tied up in commitments where price is not moving (i.e. not trending). As Jesse Livermore put it:

“In a narrow market, when prices are not getting anywhere to speak of but move within a narrow range, there is no sense in trying to anticipate what the next big movement is going to be. The thing to do is to watch the market, read the tape to determine the limits of the get nowhere prices, and make up your mind that you will not take an interest until the prices break through the limit in either direction.”

This is exactly what a trend follower who uses breakouts as a signal to initiate positions would do.
Using a stock scan (such as detailed in my e-book) will alert you to when potential setups are giving you a signal to commit your cash. Until that point in time, a trend follower has no business in opening a position in that instrument. You wait for the moment when your criteria are met before commiting.

Anticipating a price move (in the hope of getting in at a more advantageous price) may work out once in a while, but we want to place the odds in our favour as much as possible. Someone who enters on breakouts and trades trends will therefore wait for the breakout point to be hit.

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