In some things in life, it pays to be early. Getting a jump on the morning traffic or sitting down to study well ahead of a test is a smart move.
But when you trade stocks, it seldom pays to jump the gun.
Your timing plays a key part in determining your bottom line. There's a time to buy, a time to sell and a time to just sit tight and watch.
Buying before a breakout can be tempting. After all, the old market adage is to "buy low and sell high." So why wait for a stock to clear the proper buy point that's still three points higher?
Holding back can be especially tough if the market is in a strong uptrend. Let's suppose your target company just reported solid quarterly results and raised guidance. The stock is setting up in picture-perfect pattern. Resist the urge to jump the gun. If you buy before a breakout, the stock may either do nothing or shake you out.
"Your objective isn't to buy at the cheapest price or near the low, but to begin buying at exactly the right time, when your chances for success are greatest," wrote IBD Founder and Chairman William O'Neil in "How To Make Money In Stocks."
Buying at the right time means waiting until a stock takes out a proper buy point on volume that's at least 40% above its daily average. Wait for professionals such as mutual funds and hedge funds to show their hand first, then follow. Remember, it's only heavy institutional buying that can send stocks higher for long periods of time.
Boston Scientific (BSX) reversed from a record high April 6, 2004 and corrected 20% over the next month. The stock quickly rebounded. By June 8, it formed a cup with handle with a 45.86 buy point. 1
The market was in a confirmed uptrend and Boston Scientific had strong IBD Ratings: Composite 96, Relative Price Strength 76, Earnings Per Share 84 and Accumulation/Distribution B.
Boston Scientific never cleared the handle. But those who jumped in would have rode the stock sideways until July 16. That's when the medical device maker said that it would expand a recall of its stents and write down inventories by $50 million. The stock gapped down and slumped 8% that day. It tumbled to a low of 31.25 by Aug. 6. 2