Market Playground

By Jeff Pierce

The following is a true phone conversation I had with a good friend of mine during the fall of 07′, after I had learned that he started trading. My words are italicized and I’ve changed his name.

“So you started trading, what markets do you trade?”

“I trade only Apple stock. I’ve read through all their company reports and I feel I have a good understanding of how the stock trades on a daily bases. What I normally do is buy Apple (NASDAQ:AAPL) when it dips in the morning and then sell it in the afternoon as that seems to be the pattern.”

“Sounds interesting, although the whole market is rising. What do you do when it doesn’t rally in the afternoon?

“I buy more because it’ll normally pop in the morning and I can then sell all my shares and wait for the next dip.”

“Yeah, but what do you do if it goes down the next day?”

“I buy more…. The way Apple trades it always goes up. Everybody loves Apple and are using their products. This stock won’t stay down for long.”

“But Matt…there’s going to come a time when it keeps going down and you’re going to run out of money. And even if it does go up in the long run, you have to have an exit plan or the fear of losing money each day during a correction is going to cause you to sell at the wrong time. Then you’re account will be so run down it’ll be hard to trade. Trust me on this one.”

I was able to help him formulate a plan and even taught him about shorting (as he didn’t even know that was possible) and it turned out to be just in time as it wasn’t that long after we started implement these changes in his trading plan that the whole market underwent a serious correction. I often refer to this story when talking to new traders because it’s nearly impossible to believe that his answer was “I buy more” in an enthusastic manner.

Jeff Pierce is a momentum trader that specializes in market timing. By developing a proprietary timing system over the years that takes emotions out of his decisions, it allows him to be on the right side of the trade. While it’s nearly impossible to eliminate trading biases completely, there are many things one can do on a daily basis that gives enough of an edge where you can have success in this industry. Jeff Pierce is the owner of ZenTrader.ca.