Performing Research to Help Prevent Unrecoverable Losses

Performing research to help prevent unrecoverable losses prior to entering a position combined with having the discipline to apply position sizing to the same, will go along way towards long term success (or failure if ignored).

There's all kinds of research one can perform before entering a position with technical analysis and fundamnetal analysis being the most popular, but there can be more and should be.

Once you have a stock selected based on specific technical studies or chart pattern criteria (if you use these) and/or specific fundamental criteria you set (again, if you use this), it's a good idea to research news about the company itself. There are people who trade soley on chart patterns or technicals alone but I feel strongly about researching news behind a company also.

Don't get me wrong though, I have to admit that there have been many times when I have bought a stock for a scalping trade without performing enough or any at all research about the company ahead of time, but over the years I can look back and see that those instances had much higher risk and were more like gambling than anything else. It's also easy to get hooked into a bad habit such as not researching a company ahead of time if you're having profitable trades. After all, "if it ain't broke, don't fix it". Right?

Well, in trading and investing, for the long term, that's actually wrong. What could wind up happening is potentially large losses that blind side a trader/investor and put an end to any future successful trades.

A recent example of the importance of performing research to help prevent unrecoverable losses is with the stock for Rambus, Inc. (ticker symbol: RMBS).

As you can see in the chart below, thru November 15, 2011 RMBS had traded up from a low near $10.00 in early August, 2011 to $18.00+ in mid-November, 2011 pretty steadily. Momentum traders could have easily been attracted to this pattern.

Performing Research to Help Prevent Unrecoverable Losses Rambus

Now look what happened on November 16, 2011 and think about those who were holding positions in RMBS:

Performing Research to Help Prevent Unrecoverable Losses

There were certain technical signals that may have triggered an exit to some but what happened on November 16, 2011 had nothing to do with technicals. RMBS had been involved in an ongoing, dragged out lawsuit and the verdict came in, and they lost the case. For anyone NOT performing research on the news surrounding RMBS prior to entering a position, they could now have a severe loss on their hands.

For example, say someone purchased $10,000 of RMBS, or $25,000 of RMBS, or even more... RMBS closed down -60.59% on November 16, 2011. That's a big loss. Someone who did their research before entering a position in RMBS leading up to this event could have used good position sizing, and maybe even lowered their risk by using a smaller than normal position size or Options to offset their cost-basis, and not be down the full 60.59% in one day.

In closing, read the headlines surrounding a stock prior to entering a position, whether you think you are familiar with the company or not. (and when you read message boards about a stock, realize that the information others provide is in many cases simply not true at all...)




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