Wednesday, July 16, 2008

Don't fight the trend

Don’t fight the trend of a given security. It can be very painful to bottom pick or top pick. Even though it is dangerous there are still a huge group of investors tend to keep doing it.

When a stock is trending upward it is more likely that the stock will keep trending up then start trending down all of a sudden. But the mentality seems to be the other way around. When oil went to $100 it was all over the net. You could hundreds of blogs that said oil was too high and it is time to short. Well a couple months later oil was in the $140s.

People seem to forget that there is no level that a stock has to top out on. It is not necessarily that the stock hits the top of the graph you have it on so it must go down. No the stock will continue to go up until it stops.

This rule applies to down trending stocks. Trying to buy a down trending stock is like catching a falling knife, it’s going to hurt. This can be true even if you think the company is a great long term company. There are a number of instances were companies that were thought of as strong crashed and then went bankrupt in a bears market.

Jessie Livermore who was considered the best trader who ever lived believed that there was no level at which a stock was too low to short and no level at which a stock was too high to buy. He stood by that mentality by buying stocks when the market was going up and shorting stocks when the market was going down.
Basically it can be very risky to go against the trend of a given security. Stocks at a discount offer a high risk way of trading.

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