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In a sense, long-term investors are flying on the high wire, risking investment capital, and yet having no safety net below them by having no stop limit orders to protect them should the stock drop quickly and violently. And, at the same time, they have no upper limit at which point they are ready to take their profit and not risk the chance that the stock is running out of steam. |
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What the long-term investor can borrow from trader's-mind is a closer, more disciplined attention to acceptable versus unacceptable risks. With that attention, precautionary measures to manage the unacceptable risk need to be taken and this means having clearly defined exit goals from all long-term positions. Institutional traders and fund money managers know their exit price, and so should you. |
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Levels of Support and Resistance |
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Related to considering exit points and having mental, if not actual, stop losses to protect profits and limit losses, the disciplined short-term trader is often more tuned in than the long-term investor to what are called the support and resistance levels of a stock. |
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Support means the level at which a falling stock's price will be met with buyers coming in to prop it up so that it does not fall further. The stock is deemed at the support price to be a good buy. Buyers are willing to jump in at this level. When you look at a chart of a stock, you can determine the level of support by noticing where it "bounces" off a price repeatedly. |
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There is usually more than one level of support, each signaling a more severe drop than the one above it. Stock charts indicate these support levels and are well worth paying attention to. If the long-term investor knows where the stock is supported, he or she may then use this information in considering entrance and exit points. When the stock breaks through its first support level, traders may use this information to consider getting out. They can see where the next support level will be. Often, breaking through the initial support means the stock will enter a free-fall before hitting the second level. |
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Not being aware of these fairly stable levels of support, long-term investors will tend to panic when the stock falls through the initial support level. They will then sell out of anxiety and even panic, having no idea why the stock is in a free-fall. The investor who is technically able to read the chart and determine these levels will |
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