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August 23, 2006 at 12:03 pm | | Comments 7

3 Signs You Have a Pet Stock

One of my top 5 trading books is How I Made $2,000,000 in the Stock Market by Nicolas Darvas. From time to time I re-read this book because there are some good lessons and reminders in it. On page 11, Darvas refers to stocks he was trading in a funny way but one which all traders have been familiar with at one time or another:

“…For some of them I acquired a special liking. This came about for different reasons. Sometimes it was because they were given to me by a good friend of mine – other times, because I had started by making money with them. This led me to prefer these stocks more than others, and before I knew what I was doing I had started to keep ‘pets’.

I thought of them as something belonging to me, like members of my family. I praised their virtues day and night. I talked about them as one talks about his children. It did not bother me that no one else could see any special virtue in my pet stocks to distinguish them from any other stocks. This state of mind lasted until I realized that my pet stocks were causing me my heaviest losses.”

No doubt we’ve all encountered our share of “pet” stocks, but are you holding onto any of them right now? Here are three signs you may have a pet stock:

If you’re scalping stocks like GOOG, CME, RIMM or AAPL without success and yet you continue to trade them day after day, then you’ve got a pet stock.

If you’re sitting in a losing trade but you just can’t pull the trigger on it to cut it loose like you know you should, then you’ve got a pet stock.

If you find yourself repeatedly trying to time entries on a stock in which you’ve profited in the past but you cannot seem to catch a move in it now, then there’s no doubt you’re clinging to a pet stock.

Pet Stock Trade in your pet stock for some ch….ch….ch…..ching.

Any of that sound familiar?

It does to me. I made 107 points in BRCD between 1/24/00 and 2/18/00 (bought $172, sold $279), and needless to say it was the biggest move I’ve ever caught. That’s the good part. The bad part is, for the months which followed that one glorious trade, you better believe that BRCD was my pet stock. But it didn’t love me back the way I loved it, and I gave more of those profits back than I should have, little by little just hoping for one more ride on the magic carpet known as BRCD. Fortunately, I learned that with stocks, you’ve gotta love ‘em and leave ‘em!

If you’re clinging to some pet stocks, take a good long look at what you’re doing. If you’re right, your P&L will show it. But if profit seems to be the one missing ingredient in your master plan, then it’s time to let that pet stock go and look for another good trading opportunity elsewhere. Trade good setups because of the chart pattern, not because some stock treated you well back in the day. If your old favorite pops back up on your radar and you’re doing your homework, you’ll be sure to see it. There’s just no reason to cling to it until then.

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Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com

[tags]Stocks, Investing, Stock Trading, Trading, Trading Psychology, Darvas[/tags]

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