20 August 2012

Two Kinds of Strategies and their Pain in Stock Market Decision Making

There are two kinds of Strategies in making a decision of sell or buy in stock market investment. It is up to you to choose your either one of them. However, once you have decided, please do not change it frequently. Because it will make chaos in your investment.

Strategy

Strategy 1:

Never buy high; Never cut loss without rational reason.
This is my currect investment strategy. This strategy helps me avoid lots of potential paper loss. The rational reason is only made based on fundamental analysis. However, the pain or the side effect of this strategy is that it is quite normal for me to miss the chance to gain attractive profit from irration stocks. Additionally, patience is also very important to optimize the power of this strategy.

Strategy 2:

Chase high, sell high; Cut loss when something is wrong (the trend reverses)
This strategy makes me feel unconfortable compared to the first strategy. Because I believe no one can predict the other people behaviour in short period of time. Of course, sometimes it works, i.e. people tend to more optismistic when they see the price up and vice versa. Another pain of this strategy is you will never buy a company with a cheap price. However, the good thing is it is very exciting and patience plays limited role in this strategy.

Bad Strategy 

Bad Strategy 1: 

Never buy high; Cut loss when something is wrong (the trend reverses)
Obviously, when you are using fundamental anlysis to assess the bottom line (intrinsic value) of a company more the price drops, more the potential profit and safer. As a result, you should keep buy it somemore when it drops further.

 Bad Strategy 2:

Chase high; Never cut loss without rational reason.
 This is extremely risky strategy when you simply chase high and do not willing to cut loss (or more specifically, do not admit the mistake). Since you have no idea to bottom line of the company, and it will normally take few days to evaluate a new company.

As you probably notice that combining the parts of the two strategies above will only produce a bad strategy. One way to make sure you never do this mistake is writing down your strategy now in a piece of paper and put this paper in front of your desk, and then see it and read it everytime you are going to make a decision for your investment.  That's all for today. More fascinating articles and sharing will be updated from time to time in Xaivier Blog. So, you are welcome to subscribe our feed, look at our sitemap or simply visit our Homepage.

Written by: Xaivier Chia


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1 comment:

lester tarry said...

One way to make sure you never do this mistake is writing down your strategy now in a piece of paper and put this paper in front of your desk, and then see it and read it everytime you are going to make a decision for your investment.

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