Entry Points

Sometimes I get “penny wise and pound foolish” in trade entry points. What I mean by that is that I sometimes spend a lot of time trying to get the very best fill on a trade entry, only to see the stock continue to move upward and leave us behind. This gives us the choice of chasing the stock (never a very good place to be as a trader) or leaving that trade behind and looking for something else.

The irony of trading is that the hard trades to enter are the ones you most want to get filled. Competition for sought-after shares from other traders who also think it is a good trade makes execution difficult at a desired limit price. Yet these are usually the stocks you want to own. If you instead think these leaders have run up too far, and start to pick less desirable stocks you hope will catch up, you are likely to be left with poor trades. The saying, 'If you lie down with the dogs, you get up with the fleas' is very true here. If you don't fight to get on board the leaders, and instead let the market pick your stocks, you get only the bad ones.

As a result, the most expensive trade for most of us is the trade never done. The impact of these missed trades can be expensive, and failure to execute these trades usually costs more than the squabbling over trying to get in at a specific limit price. If you don't track these trade that get away, you will believe you are doing a good job when you may be leaving a lot of opportunity on the table. One solution is to place market orders when you are concerned about missing out on a breakout situation. We usually discourage market orders, but a fast moving stock with a lot of volume can and sometimes should be the exception to that rule.

Bottom Line – Try to think about this another way. If you think you're saving 10 cents a trade by placing limit orders, if you miss just one five-point mover because of a limit set too tightly, then it will take 50 trades worth 10 cents of savings to make up for this trade not being done. Think about how you currently enter trades and evaluate whether you should make any modifications to help capture more of these types of trades.