ZF Capital

LIKE A NEW LOVE, the beginning of a journey or a fresh hand of cards, the first trade in a particular stock is exciting and seemingly rife with possibilities. But the toughest and most important trade you make is actually the second one. Happy relationships, smooth travel or winning blackjack all require skillful reaction to changing circumstances — and so does successful trading. What matters is the all-important follow-through. In every market and with every product, managing a trade is even more important then making it in the first place.

Anybody can buy a stock. It’s how you manage the fallout that matters. Lots could happen: The economy could slump. Or interest rates could rise. The company’s sales could falter, or its CEO could get run over by a bus. This is the problem with following the fundamentals. It means concerning yourself with things that are far out of your control.

What really matters ultimately is the price action of the stock itself. When you buy XYZ at $50, there are only a few possible outcomes. XYZ could go up, down or go nowhere at all. We will briefly outline what I believe to be the time-tested rules for what to do next.

Let’s assume XYZ rises to $55, whether thanks to prayer, skill or just plain old luck. Even in a tough economy with soggy stock indexes, there’s always a bull market somewhere. You’ve got a winner on you’re hands, so forget the headlines. You’re up five points on XYZ…what’s your next trade? (more…)

LET’S SAY YOU want to buy XYZ. Maybe it announced better-than-expected earnings or crossed a key moving average. Perhaps you are watching a similar company or index move and expect XYZ to follow along. Maybe you used the company’s products or read some compelling research. As Rod Stewart sang, we all need a reason to believe. Whatever your reason, you believe. Fine. Two sides make a market, and nobody knows the future. If you are bullish on XYZ, then it’s time to buy XYZ.

What messes most people up isn’t what to buy, but how. Having a good investment idea is a start, but putting it into practice is another thing altogether. And while a sound trading technique won’t prevent you from losing money, it will keep your losses small and the majority of your capital focused on the most profitable ideas. No trade is without risk, but the difference between risk and recklessness is proper procedure. Trading is like any fine art: There is such thing as objectively good form.

The oldest — and the only surviving — of the ancient Seven Wonders of the World are the Egyptian Pyramids. Their longevity is due, in part, to inherently strong design. The majority of a pyramid’s mass rests at its base, closest to the ground. A much smaller portion of the material is used near the top. The setup creates a uniquely stable architectural footprint. (more…)