8 Guidelines To Follow When Purchasing New Stock

1. After a new stock purchase, draw a red defensive sell line on a daily or weekly graph at the precise price level where you will sell and cut your loss. In the first 1 to 2 years of a new bull market, you may want to give stocks this much room on the downside and hold until the price touches the sell line before taking defensive action.

The defensive, loss-cutting sell line may in some instances be raised but kept below the low of the first normal correction after your initial purchase. If you raise your sell point, don't move it up too close to the current price, because any normal little weakness will shake you out of your stock. If your stock increases 15% or more after a correct purchase, move the defensive sell line up to less than 5% below the pivot purchase price.

2. Your objective is to buy the best stock with the best earnings at exactly the right time and have the patience to hold it until you have been proven right or wrong. You should give securities 13 weeks after your first purchase week before you conclude that a stock that hasn't moved is a dull, faulty selection. This, of course, applies only if the stock did not reach your defensive sell price first.

3. Any stock that rises close to 20% should never be allowed to drop back into the loss column. For example, if you buy a stock at $50 and it shoots up to $60 (+20%) and you don't take the profit when you have it, there is no intelligent reason to ever let it drop all the way back to $50 or below and create a loss. You may feel embarrassed, ridiculous, and not too bright buying at $50, watching it hit $60, and then selling at $50 to $51, but you've already made the mistake of not taking your profit. Avoid making a second mistake and letting it develop into a loss.

4. Always pay attention to the general market. If you Initiate new purchases when the market averages are topping and beginning to reverse direction, you will likely have trouble holding the stocks bought.

5. Major advances require time to complete. Don't take profits during the first eight weeks of a move unless the stock gets into serious trouble or is having a two or three-week "climax" rapid run-up on a stock split. Stocks that show a 20% profit in less than eight weeks should be held through the eight weeks unless they are of poor quality without institutional sponsorship or strong group action.

6. If you own a dynamic leader or a stock belonging to a leading group, you may want to hold it at least until its weekly close is below its 10-week moving-average price line on increased volume. Some outstanding leaders go an amazing distance before this occurs.

7. If possible, try to hold through the stock's first short-term correction once you already have a profit.

8. Holding for a long-term gain during the early stage of a new bull market, in many cases, may force you to stick to your position long enough to make a big gain. Remember, the object is not to be right, but to make big money when you are right