Today's Quote: “An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen.” Earl Wilson.

There are several good books out there about trading that should be on every trader’s must read list. If you were forced to choose one and only one, the only possible pick would be “Tools and Tactics for the Master Day Trader”. We are going to run a series of excerpts from the best selling book for the next series of lessons. Now in the words of the master trader himself, Oliver L. Velez…

SECRET #14: THE BUY-LOW SELL-HIGH METHOD IS WRONG FOR DAY TRADERS

It has always fascinated me that when it comes to playing the market, whatever we find psychologically easy to do is almost guaranteed to be the wrong thing to do. I have found that in no other endeavor is this more so, which is precisely why trading the markets successfully is such a difficult undertaking. Let's take the universally accepted concept of buying low and selling high. This approach to the market has been touted as the basis of correct market play for many decades. "Buy low, sell high.” It's simple. It's basic. It's succinct. It's apparently true. But it's also terribly wrong, at least most of the time. Why? Because buying low typically entails purchasing a stock that is going in the exact opposite direction (down) from the most desired direction (up). When we take time to apply even a cursory level of intelligence to this concept, we quickly discover how silly it sounds. In order to buy low, one must focus on buying stocks that are going down, while our true desire is for them to go up. Does that make sense? Would we entertain, even for a brief moment, the idea of taking, let's say, a train that is going in the exact opposite direction from our desired location? Wouldn't every 6-year-old be able to tell us that going west, first, in order to go east is a tremendous waste of time, especially when one can simply start the journey going east? Why then don't most people apply the same simple wisdom to trading or investing? Why not simply buy stocks that are already doing what we want them to do, going up? Why? Because buying low is appealing to our nature. It's comfortable. It sounds right and feels good. Hey, after all, isn't paying less the American way? Yes, but when it comes to the market, it leads to wasted time, money, and potential profits. Now granted, I may have oversimplified this matter a bit, but not much. Concentrating on stocks that have already demonstrated their ability to rise is intelligent trading and investing. Focusing on stocks that are doing what we don't want them to do, in hopes that they will soon do what we want them to do, is nothing more than guessing and gambling.

MASTER TRADING TIP

All master traders, particularly those who day trade, know that a stock is not good unless it's going up. Short-term traders, however astute, do not have the luxury of time. When they enter a trade, they must be reasonably sure of attaining their profit goal with a very minimal amount of time. Time for the investor is a friend, but for the master short-term trader it is an archenemy. While buying a stock that is headed down may turn profitable, master traders learn to wait for the stock to head in the desired direction before jumping on with all their might. This is not to say that master traders buy late, as much as it is to say they buy smart. They are not interested in guessing or gambling. They simply know that jumping on board a train that has just begun its move toward the destination of profitability is far smarter than trying to luck out on those train that they think will eventually move in the desired direction.