Trading Stocks and the Power of Waiting
Back in the 1960’s, at Stanford University, a professor came up with a devious experiment.
He took pre-school kids, around 4-5 years old and stuffed them each alone in a room with a chair and a table. On the table, he placed a single marshmallow (or sometimes a cookie or pretzel). He told the child that he was going to leave them alone in this room for 15 minutes. If they did not eat the treat, when he returned, he would give them a second marshmallow and then they could eat them both.
If they ate the marshmallow during the 15 minutes…no second treat.
When he left the room, some of the kids launched up out of the chair and immediately popped the treat in their mouths. Some of them just calmly sat in the chair and patiently waited for what they knew would be two marshmallows.
Others had to really work hard not to eat it, coming up close to the marshmallow, petting it, some even licking it (yes, they took video footage…it must have been pretty funny to watch).
But here is where “the marshmallow experiment” got really interesting. The study tracked and checked in with these kids as they got older….a lot older, into adulthood.
Guess what they found?
The kids who were able to wait for the 2nd marshmallow…the ones who had delayed gratification, were the ones who had higher grades, higher SAT scores, had lower body mass index, had better social skills, made more money, etc.
When you think about it, this does make sense. In life, it takes discipline to exercise, to study on a Friday night for a big test on Monday, to not wolf down a pint of ice cream, to save money and not spend it all on the latest shiny iPhone or car.
To sacrifice the immediate gratification now for something of greater value later.
And the same applies to trading…
Patience and waiting, is extremely important when trading
I can tell you from personal experience that having patience and delaying the need to jump on a trade, or constantly having the need to “be in the action” is extremely important.
Many, many years ago, I had grown an account from around $1,000 to about $40,000 in about 1 year’s time. I had just made a killing on my most recent trade and took my profits.
I was so excited and pumped, I couldn’t wait to get back in the action. I still remember that I was literally shaking that day. My head was pounding. At the job I was working for at the time, I remember going into a meeting and I could barely pay attention…thinking about my next trade and how much money more money I was going to make.
I quickly found a few stocks that looked like they would pump higher and jumped on both of them…both penny stocks. In the back of my mind, I had a bit of an uneasy feeling, thinking maybe I should wait, research them some more, watch them a little more, but all I really saw was my profits….$100,000+…SIX FIGURES.
That didn’t work out so well. They fell like rocks, I didn’t take the loss right away either, holding out hope that they would come back. That never happened.
That was then, this is now…right?
In some ways, yes and in other ways, no.
I certainly don’t get anywhere near as emotional like that anymore. I’m actually pretty flatline about both profits and losses.
I use set stop losses and when they hit, I’m out and I move on.
I don’t go looking for stocks to trade, my screens find them for me.
When it comes to entering a trade, I make sure the pattern, the chart, the reason for getting in, is just right.
- That takes patience
- That takes time.
- That sometimes takes watching
And that is primarily what I want to talk about…watching (patience).
Patience and the art of waiting for a trade to come to you.
My stock screens (filters) sometimes give me a trade that is immediately perfect in every way, showing me a stock chart that has everything that I look for in a typical trade. When that happens, I end up taking the trade right then and there, the very next morning.
That doesn’t happen that often. Most of the time, the results from most of my filters are not EXACTLY what I am looking for.
I have to lay eyes on the chart of each and every filter result to see if it happens to match my ideal scenario. If it clearly isn’t a match, I never look at that chart again.
However, if the chart is showing some promise, but needs time to develop further, I add it to my watch list and patiently see what the stock does, day by day.
And that takes discipline. I sometimes see charts that really have a ton of promise, and I’d really like to be in on the trade and not want to miss out on a potential big move…but I wait. If it leaves without me and I was wrong about a potential entry, so be it.
But when you wait for a stock to finish retracing, where it reaches support and shows signs at the pivot point of support (through indicators, candlesticks, volume) of getting ready to turn back up…I enter at a near ideal bottom and the stock usually turns higher.
Take a look at this stock that I have on my watch list…IFRX.
I saved this chart on their website.
What is cool about TradingView, is that anyone can then click on the “play” icon that I circled with the yellow highlighter. This then shows additional bars (in this case…days) after I drew my chart and made my call.
If you click on the image above, click on the “play” button, you can see what is starting to happen after I made the call and added it to my watch list.
You can see that what has been happening since that large single day decline when I added it to my watch list, where I added the down arrow and a note about what I thought might happen.
So far…so good.
If this continues to meander towards that uptrend support area, and then starts to show signs that the decline is about to halt, it might be a great swing trade back up!
My point here is that it pays to wait.
In some ways, I actually prefer to have a very promising chart like this show up on my filters. When I came across this IFRX chart, it certainly wasn’t ready to buy.
It is like a fruit that hasn’t ripened yet. This way, I watch…and watch…and pounce when it is ripe!
Instead of searching desperately for the next trade, jumping on a stock that JUST showed up on your filter..instead you calmly wait and decide if this could be the next trade for you.
Here are a few more examples on TradingView.
You can just click on the “play” button to watch the bars that occurred after I created the chart.
- TMQ – I’m currently in this trade, entered at $2.40
- DSS – I’m currently in this trade, entered at $1.21
Do some of the trades move right back up after I add them to my watchlist where I am expecting a further decline?
Of course they do!
Here’s one – REPL
Some end up coming back to me, others just rocket away. That’s ok…again, patience pays! I’ll take the trades that are there and wait for the promising ones that predictably fit exactly what I am looking for.
All of these trade setups come from just one filter that I created on Finviz.com. IThe premise is to show stocks that had a huge 1 day decline, but had been doing quite well up until that decline. The results are more likely to fit the patterns that I look to swing trade.
Not all of the results on the filter are potential setups that I like enough to add to my watch list, but I usually have at least one or two and sometimes 3-4 that I add to my list and then patiently wait and watch for a potential entry.
If you want the same filter that I used…
These trade examples above came from a Finviz filter that I created. Anyone can set it up for free themselves. If you want it, just shoot me an email to firstname.lastname@example.org and I’ll send it over to you!
If you find that you are over-trading, or entering trades too early, or simply looking for any trade to take RIGHT NOW, just to be in the action…having a filter like this is very helpful.
That is because the results are not yet ripe. The results are not trades that you can take right now.
When you have a filter that isn’t trying to show results of trades that are absolutely perfect:
- You have to wait
- To plan in advance
- To watch
This helps to teach discipline, to get a feel for how a stock behaves.
Believe me, it get’s addictive when you start to notice that by doing this you become more profitable…you end up with more winning trades…you find that you don’t have that urge to jump on trades without a well thought-out plan!
You can set up your own filters that fit whatever your trading strategy is and then create your own watch lists of stocks that show promise of developing into trades that are ready to take in the future.
This way….like our marshmallow-tempted kids…you learn to wait. And if you wait, you sometimes get more out of life! 🙂
Good luck with your trading & let me know if you need anything.
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