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| Trash goes in trash cans not in your portfolio. |
I like to position trade. In the future I may swing or day trade. These types of market strategies are certainly more risky then value investing or income investing. In order to limit my risk as much as possible I only work with the stock of good viable companies. I will not trade a stock that has a garbage company behind it no matter how hot the stock is.
One of Jim Cramers rules for trading is, "Never let a bad trade turn into a bad investment". This is a great rule. If a trade goes against you then you need to sell out of it and maintain discipline. What happens if you have a horrible trade that gaps down well past your trades exit point? Well if it is a momentum stock with poor fundamentals and its multiple finally decides to start reflecting that fact then your in trouble. At this point you will have to wait for the stock to float back up a bit so that you can sell it. The price you get may be well below your exit point in some circumstances. You will have no choice but to sell at this point, the stock had bad fundamentals and now the market has now turned against the stock and it will trend lower in the future.
If you only trade stocks that have good fundamentals and good a corresponding multiple, (PE ratio), if something catastrophic happens and the market crashes gaping down below where your exit price is you will have more options. The price should recover much more then a stock with poor fundamentals. You may also have the choice to just add the trade to your portfolio temporarily depending on what drove the price of the stock down dramatically.
Trading the stocks of strong companies with great fundamentals is a great way to give yourself more options, trade from a position of strength, and most importantly sleep well at night.
