Investment U

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Making Better Entries: Three Ways to Earn Your $1,200 Edge
by D.R. Barton, Jr.
Chairman, Trader’s U

Add $1,200 to your portfolio – every year . That was the concept we reviewed in last week’s article. Here’s the basic idea:

If you can improve the entry price on each trade or investment you make by only 10 cents, then you can add lots of cash to your bottom line. A review of the math:

(2 trades per month)
x (500 shares)
x (12 months)
x ($0.10 per trade)
= $1,200 per year

Obviously, if you trade or invest more often, or if you buy more or fewer shares your results will change accordingly. But the end result is the same: You can add significant money to your portfolio each and every year by spending some time refining your entries.

Many people, especially those who are building a portfolio of long-term positions, don’t even think about entry price. They only know that they want to be in on the good opportunity that their research or newsletter has uncovered.

I’m reminded of a meal that I had at a friend’s house recently. After cooking a delicious assortment of meats on the grill, my friend decided to add some asparagus to the menu, which he would quickly steam in the microwave.

I was delighted, because asparagus is one of my very favorite foods.

He took the asparagus out of the fridge, washed it well, plunked it in a dish and microwaved it. In no time we were munching on asparagus and a tasty mixed grill.

Problem was that when I got down near the stem end of the asparagus, it got too tough to chew. And I never knew just where the tough part was going to begin. So for each spear of asparagus, I either had to stop too soon and throw out a good piece or munch down too far and chew on a tough piece.

All because my friend didn’t know the simple technique for breaking off the tough ends of the asparagus spears before cooking them (a tip I shall divulge below in the “TU Tips & Tricks” section).

Quickly cooking asparagus without snapping off the tough end is similar to jumping into a trade without looking for the best entry point. Many traders don’t take the extra step of looking for the optimum entry point because they don’t know the techniques to use to get a better entry.

Refine Your Entries – The Tools Needed to Claim Extra Profits

Here are three ways that you can improve your entry points:

• Enter on a pullback. Most long-term traders and investors trade in the direction of the price trend. A tried and true method of getting a better entry price for trend followers is to wait for a pullback. This is especially true if the price has made a strong move up, just prior to your desired entry timing. Look for a pullback to a recent support level or to a key moving average line. Even a pullback to a one- or two-day low can give you a good edge for your entry versus “buying at the market” the minute you read your newsletter.
• Buy on a breakout. This is for stocks that are under strong momentum (fast moves up in price). One way to help your portfolio grow is to avoid situations where you can easily lose money. Waiting to buy on a breakout can improve your bottom line by keeping you out of trades and investments that didn’t end up going in the right direction.
  
  Let’s say that you get a buy signal from your research or from a newsletter. The price is about 50 cents below the 52-week high. It may make sense to wait and buy on the breakout above the 52-week high, because many times that old yearly high forms a resistance level for the stock. Many times, prices trade up to or near old resistance levels and then fall back. If this happens, and the stock is still a buy candidate according to your strategy, then you buy at a much better price. And occasionally waiting for the breakout to actually happen will keep you out of a stock that never does break above that key level.
• Be patient and wait for the newsletter “pop and drop”. A phenomenon that plagues many successful newsletters is the “quick pop” in price that happens immediately after a recommendation is made. This happens because many subscribers want to get in on the recommended play.
  
  Here’s a strategy to try if the picks from your favorite newsletter seem to run up very quickly right after you read about the pick: Don’t chase the price up! Wait until the feeding frenzy is over and then see if the price pulls back to a more reasonable level. A good rule of thumb is that quick moves like this will retrace at least 50% of their move. Your patience could be rewarded if you are willing to wait an hour or two, or even a day or two, for prices to pull back after the initial flurry of buying.

One extra issue to consider: Some savvy traders and investors are thinking, “What if I wait for a pullback and one never comes, or doesn’t come in time?”

It’s a great question and can be answered by combining the first two techniques from the list above.

When looking for your entry, set two price levels. The first will be the pullback price that will give you your optimum entry price. The second is a breakout level above which you believe the stock will make a strong push up in price. With these two levels, you can get a better (lower) entry price if one presents itself. And if that pullback never happens, you’ll be prepared to enter at a breakout price so that you’re assured to have your position established for the long-term move.

With a little practice and study, everyone can improve their entry techniques and add to their profits.

Today’s TU Tips & Tricks