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Many traders question their reasoning behind entering certain trades, especially the ones they take a loss on. A trader should be able to provide a reasonable explanation and the reason should never be just because someone suggested that a certain stock looks like a good long position or looks like a good short position. A day trader should know by looking at a chart, why they entered a trade. If you don’t, you should seriously reevaluate your personal trading strategy.
For day traders or traders subscribed to some form of trading service, stock picks may be given by various methods. It is not the responsibility of the trading service, if you the day trader decide to enter any position. Most trading services, such as Millennium-Traders, provide stock picks for either a long or short position and you the day trader must decide if or what your entry price is. At no time should a trader chase any stock just to get position.
Experienced traders monitor charts; never trade without charts and always refer to a chart prior to taking any position. Day traders or traders should never consider taking a position in any stock without looking at the chart, an intentionally repeated statement. Some ruthless trading services pump and dump stocks and, if the trader does not first review the chart, they may very well become a victim of a pump and dump service resulting in loss of their trading capital or sometimes facing a very large loss.
What does it mean to ‘chase a stock’? Chasing a stock means the trader placed an order to enter a rapidly moving stock, possibly by using a market order, just because the trader wanted in; their personal trading discipline was totally ignored. More times than not, a trader who chases a stock, will get burnt and lose on the trade, possibly much more of a loss then they were prepared for. Generally, an entry taken while the day trader was in the ‘chase the stock’ mentality, the run on the stock is done and the only winner is the other trader who was exiting on your entry. They sold their shares (on a long position) to you; or they covered their short position just as you were getting in. When the trader tries to exit their position, since the run is probably over, either they will become an investor because they don’t want to take a bigger loss than they anticipated or, they face a much larger loss than they anticipated.
What does it mean to ‘catch a falling knife’? When a stock price is falling and sometimes quite rapidly, the phrase to ‘catch a falling knife’ means the trader thought the stock price was going to turn higher and took a long position, when they should not have. Little did they know that, possibly the bounce was merely backfill by other traders who were looking to short the stock more. When a stock is rapidly falling, remember the trend is your friend. Unless you see the chart begins to bounce in a higher direction, possible moving above the daily moving average, a long position should be avoided.
Day traders should demo trade extensively prior to jeopardizing any of their trading capital in the stock markets. Day traders should seriously consider utilizing training programs offered by certain professionals in order to improve their entry skills. For many traders or day traders, the cost of a training lesson is a bargain compared to the amount of money lost when they first begin to day trade. Traders and day traders may consider a training session with one of the professionals at Millennium-Traders, One-on-One Training for Stocks, Futures or Forex.
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