Think about it for a moment. You are eagerly watching a stock price move on the chart and it is up trending. You are preparing to enter on a position but don't know when or where exactly.
Most amateurs dive straight into the pits as they see the price move higher and higher and they think they gonna miss the wave if they don't act now.
In trading, the hardest thing to do is WAITING for the right moment and not act on the impulse!
Typically, after the amateur dives in, the stock retraces down! And he is constipating a paper loss. Having very bad psychology management, the dip downwards gets his stomach churning sideways and under.
As it dips further, his psychology takes a whipping and he realized he made a wrong entry and proceeds to cut the trade at a loss. Seconds after he has cut the trade, the stock resumes its uptrend! And he kicks himself in the butt realizing his folly.
If you look at the stock chart attached, you will see 2 arrows. One in Red and the other in Black. The amateur would typically buy at where the black arrow is.. looking at it, logically it tells you that you are buying on a HIGH. And you don't wanna do that, because the whole idea is to Buy Low, Sell High for max profit. And because he doesn't know how to manage his emotions, he screws up by selling off at a loss and then later regrets when the price returns to the up trend. Double psychological whammy! Very very bad for the amateur.
But the prudent trader when he sees a good up trend, will not jump straight into it. He will wait for a pullback in the price, or what we call a dip in the up trend. Why is buying the DIP (red arrow) so sensible? A few reasons:
1. When the price dips, and you buy it, you are buying the LOW. It won't be lower than the previous low, but in trading, what matters is the forward movement of the trade. You can't trade the past. You can only trade what is before your eyes at that moment. Therefore, a LOW is a LOW no matter what.
2. Logically, after the price has dipped to its low and doesn't go any lower, where do you think the next likely direction would be? UP of course! (sometimes it goes sideways, but very unlikely in a strong trend)
3. The lower you can buy on the dip, the quicker your initial loss (from the bid/ask spread) turns into profit when the stock resumes its up trend. That way, you don't have to constipate paper losses or even so, it is minimal before you see the trade move in your favour. This ties in with point 1. A low bought, will always see a higher high in an uptrend. And therefore profit nonetheless.
All these work similarly when you are Selling the Rally in a DOWN trend. Aka Sell High, Buy Low.
In conclusion, never get hasty on an entry to trade. If conditions are not favourable, DON'T TRADE.
WAIT for the right moment to enter! If the moment passes you by, don't go chasing after it! Let it go. Wait for another good moment to enter. That's life.
Happy trading and don't do anything stupid :)
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