Penny Wise & Pound Foolish .................................
I see a lot of traders get "penny wise and pound foolish" when it comes to placing entry orders. Read on below for a powerful example of how it could take you 50 trades of good order entry savings to make up for 1 missed trade's profits.
"The biggest trades are winners right from the start." I noted that next to a recent list of my recent trades, as the ones that ended up most profitably seemed to get off to a good start and stayed that way.
Historically I have noticed that my best and biggest trades are right very quickly, and they just keep getting more and more profitable from the start. One of the lessons I have learned over the years is that when you study your best and worst trades in search of patterns, you have to also include the trading ideas where you did not get filled. 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 makes execution difficult at a desired price. Yet these are the stocks you want to own. If you instead think these leaders have run too far, and start to pick laggards you hope will catch up, you are likely to be left with poor performers. 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 is the trade never done. The impact of these 'undones' 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 the undones, you will believe you are doing a good job when you may be leaving a lot of opportunity on the table. The solution is to place market orders when you are concerned about missing out on a breakout situation.
Thought about 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 done.
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