One of the first rule-breaking temptations investors face is the urge to buy a stock before it reaches its .
It also tends to be one of the market's first harsh lessons.
Buy points are plotted specifically. They are not simply placed at the high mark of the , or the left-side high of the cup. They are placed 10 cents higher.
That added dime is a risk reduction tool, put in place by IBD founder and Chairman William O'Neil after being taught many tough lessons.
The first key to buy points is to know your chart patterns, your base types and follow-on opportunities. These are confirmed by research into the behavior and traits of winning stocks running back to 1880.
The objective behind all this work isn't to learn how to buy stocks at the cheapest price or near the low. The investor's objective is, O'Neil says in "," "to begin buying at exactly the right time.
The "right time" may be different among various types of investors. Value investors often want to buy stocks poised to recover off lows.
For instance, Berkshire Hathaway Chairman and CEO Warren Buffett has said that rational behavior is a combination of intellect and emotional discipline. In the stock market, intellect reflects in how well an investor does his or her homework. Discipline, he says, "refers to your ability to wait for the proper price to enter.
Do you want to win as a growth investor? Wait for the stock to prove itself with a big .
The proper purchase price for Chipotle Mexican Grill (CMG) in June was 419.79. The stock was building a two-month . The base was tight, although much of it formed below the 10-week moving average.
Trading had dried up as the stock eased slightly, four days into a near picture-perfect handle. On June 26, the stock rose to 1% below the proper entry. 1 Why not buy now
In addition to being below the buy point, the handle was a day shy of maturing. Investors who followed the rules sat comfortably as the stock, in the handle's fifth day, gapped down 6% in huge trade. That started a correction that drove the stock down 47% in the next three months.
On July 20, Chipotle fell 22% July after reporting Q2 results.
There is no shortage of other examples. Look at Akamai Technologies (AKAM) in April, WellPoint (WLP) in June and Citrix Systems (CTXS) in July.
Just keep in mind, waiting for a buy point reduces risk. It increases your odds of success.
O'Neil says "you want a stock to prove its strength to you before you invest in it." In time, waiting for a surge through the buy point becomes second nature.