Stock Trading: When You Buy is as Important as What You Buy

The fundamentals look great, the story is terrific, the ratings are top, analysts and Jim Cramer like it - so you buy. And the stock promptly goes down. What went wrong?

The timing.

There is a time to buy a stock, a time to hold it, and a time to sell or avoid it. Once you've checked the fundies, you still need to determine whether a stock is a good buy at current levels.

Pivots tell you the best time to buy a stock
There are times when a stock is most likely to go up (or least likely to go down), greatly increasing your chances for a profit while minimizing the probability of a loss. There are other times when, no matter how good the fundamentals are, buying a stock is risky due to increased probability of a loss.

To determine whether a stock is a good buy at current levels, use charts. Charts don't tell you what a stock is going to do every day or every minute but they alert you to important pivotal points in stock moves. Stocks spend most of their time building chart formations (bullish or bearish). It's when a formation is complete that you can determine with a high degree of certainty what the next move of importance is likely to be, and act accordingly.

Time element - don't tie up your capital in duds
Stocks spend a lot more time in the bottom ranges than in the top. A bottom (or a base) can last anywhere from 3 months to 10 years. Buying at the bottom may in some instances limit your downside risk but will tie up your capital in a stock going nowhere for years.

Pinpointing the exact buy points takes practice and experience but one glance at a chart may save you from a major disaster if a stock you are considering is in a pronounced downtrend.

The power of rotation
Don't underestimate the power of rotation. Every bull market produces a new crop of leaders (biotechs, Internets, oils, fertilizers, etc.) but there is also a stock for every season. For example, early in the recovery retail stocks do well, whereas heavy machinery / commodities usually rise late in the business cycle.

When it's NOT a good time to buy
One last word: timing does not include public enthusiasm or high ratings. Price always precedes the story. If you wait to buy till everyone loves the stock and is recommending it, you are too late. In stock trading, people act first and talk second. When everyone is gushing about a stock, it means they have loaded up on it and all they can do now is try to get others to buy.