Last week, I shared with you the importance of the postmortem trade analysis. I know it sounded a little strange to you, given that most people think a trade is over when you exit your position and book either a gain or a loss. However, that’s far from the case. Remember that investing is a process, and only by performing this autopsy-like analysis will you understand what went right and why. How can you hope to repeat good behavior and avoid past mistakes if you don’t recognize them?
That’s why this week I want to share with you another part of my in-depth analytical process that helps me watch for signposts along the investing road. These signposts act as confirmation points or warning flags, depending on how things are progressing in the industry, at the company, at one of its competitors or, sometimes, from an unexpected area.
What I’m talking about here is the pre-trade analysis. Compared to the postmortem analysis, the pre-trade analysis entails identifying those key factors that influence a company’s business, recognizing the current and longer-term trends in the those drivers and what potential disruptions lie ahead.
While today we have GPS navigation in many devices, this approach is much like the way many of us used to drive — by watching the road and checking a map for markers, or even asking for directions and looking for signposts along the way. Much like those driving experiences, as you see the markers and signposts, you have a growing confidence that you are on track. If you don’t see those markers, after a while you’re going to wonder where you are and how far off you are.
Think of it this way: if you were to construct a map that sketches out directions for a friend, you would be sure to include the key sites they would see on their way, and these would let them know they were on course or signal them that a change in direction was nearing.
Chris Versace is the editor of PowerTrend Brief — a FREE, weekly electronic newsletter. He also writes PowerTrend Profits, a paid monthly newsletter that helps individual investors profit through buying shares of companies poised to win big in the 8 PowerTrends, as well as writes the PowerTrader trading service that seeks to deliver short-term gains using stocks, ETFs and options. Chris has been ranked an All Star Analyst by Zacks Investment Research.