With markets pulling back as they have the past couple of weeks, this could be an opportunity for you to buy the dip. If that is something that you are considering, I would like to add that picking your spot for an entry point is something that is very important in investing.

Before we go any further, allow me to shed some bad news to any beginning investors. You will never buy the exact bottom and you will never sell the exact top. Yes, it may happen, but don’t count on it.

Let’s look at two examples of why patience is important. For purpose of simplicity, I will use stock as an example. This could be applied to options, futures, or anything traded.

The first example is when XYZ stock is trading at 45 and you want to buy it at 42. At first, you may want to simply place a limit order to buy it at 42. While I like the idea of waiting for your price to enter the market, I think the limit order is only partially what you need. Remember, you are NOT in the market before you enter a trade. That means that you get in when you want to and you actually have control of your money. The second you enter a trade, you no longer have control, the market does. It is for that reason, that I like to be very picky with entry points. Thus, the main concern with that order is that you may be catching a falling knife. So, if XYZ were to fall to 42 and keep falling, you would fall with it as low as it goes.

With all that said, we now can move to the second part of what that order would be. I like to use 42 as an alert point in the trade. Once it gets to the 42 level, it is at a level that I would consider giving up control of my money to the market. So, when we are at that point, I will begin to watch. XYZ can either stay the same (rarely happens), go down, or go higher. If it goes down, I simply watch it go down and am happy that I’m not in it. It is when it “starts” to go up that I like to enter. My ideal entry point would be when it bounces off of 42 (which proves that I’m right) and is up around 42.50. That way, I have a bit of confirmation. Yes, I am giving up the .50, but I’m ok with that as I don’t want to catch a falling knife.

Keep in mind that if it goes down from there, I’m on the hook for buying at 42.50 instead of 42. I’m ok with that as it is a small amount and I get my confirmation.

The second example is when we have a pullback already, but we are still near highs (sounds familiar). The mechanics are different, but the concept is the same. I like to wait until the market has gone through its point of resistance before buying into it. Yes, you may miss some of the upside, but it can be very helpful to get a confirmation in what you are looking to do.

For example, you like XYZ stock. It just made an all-time high of 55 a few weeks ago. It has been trading in a range between 53-54.50. While you want to buy it, it is still a bit high. The fact that it is at a high needs to be respected. So, in this example, I would likely not buy into the stock until it closed above 55. That way, the stock would have made a new all-time high.

None of these example are ever perfect, but hopefully these ideas can help you.

If you would like to learn more about what we do at St. Charles Wealth Management, feel free to send me an email at mtosaw@rcmfs.com.