Trading Note #2: Buying in on a rally

Just missed a short-term rally yesterday.

Points learnt:
When deciding at what price to enter into a position, consider:

  1. Is the stock price very volatile?
  2. Will the recent good news cause the stock price to jump to a higher and stable level?

If the answer to both questions is yes, then you have to be willing to enter into a position at a higher price — don't be greedy. Warren Buffett has an analogy of swinging his bat _only_ when the odds are clearly profitable. I would say that that happens in the case when you can afford to "not buy". But sometimes, the potential gain (ie. opportunity cost) of having a position is large enough for you to swing slightly off just to catch the ball, else the game might just finish without you.

In summary — don't be greedy. If you really want to be long a position, be prepared to give a little. You don't really have to catch the highest high to sell, and the lowest low to buy.



One thought on “Trading Note #2: Buying in on a rally

  1. This is very nice and informative post. I have bookmarked your site in order to find out your post in the future.

    Posted by Best Home | August 17, 2007, 4:53 pm

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