Published on October 6, 2007
Nine Trading Mistakes
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Mistake 1: Fishing for Bottoms Bottom fishing — trying to catch a stock as it bottoms out — is a great way to get soaked and lose a bucketful of money. In a bear market, stocks get much cheaper than most of us ever expect or want . They won't stop falling until they've run out of gas.
Mistake 2: Timing the Top Tops and bottoms share something in common. They rarely arrive when they're supposed to. When traders and investors are exuberant, they keep buying even after doing so no longer makes fundamental sense . That's why shorting a stock that's trending higher makes no sense, even if its price is far beyond reasonable.
Mistake 3: Trading Against the Dominant Trend Trading against the dominant trend in the market leads to costly mistakes . Unfortunately, misidentifying the trend by focusing on the chart in front of you and forgetting to look at the next higher level chart is an easy thing to do.
Mistake 4: Taking Trading Personally A losing trade is bad for your trading account, but you can't let it get to you. Sure, it makes you feel bad, but a losing trade doesn't impugn your honor or disparage your heritage. A bad trade may reduce your net worth, but it shouldn't damage your self-esteem.
Mistake 5: Falling In Love When you fall in love with your stock, you risk large losses. It's easy to fall in love. After doing hours of research and analysis, you want to be right. You want your trades and your trading plans to generate profits, but hoping doesn't make it so. Be smart. Don't fall in love. Dow Jones doesn't have feelings and your stock won't love you back .
Mistake 6: Chasing Runaway Trend If you miss the breakout entry point for a stock that you want, waiting is better than entering a position as a trend accelerates. Often, stocks will pull back and test the breakout point. Wait for that point, or wait for the stock to take a short breather after its first leg up. If you're still interested, that's a better entry point than chasing a stock as it accelerates into the trend. Like a fine wine, you sometimes need to let a stock breathe .
Mistake 7: Fishing for Bottoms Averaging down is a below-average idea. You sometimes hear advisors suggesting it as a way of reducing your cost basis, but it's really merely a technique to throw good money after bad. The logic of averaging down is completely contrary to the logic of trading. Traders sell losers. They don't reward them with infusions of trading capital.
Mistake 8: Ignoring Your Stops Talking yourself out of honoring your stops is an easy thing to do. You'll be tempted when a trade goes against you. You'll look at your indicators and the support levels on your charts, and you'll be certain that the stock soon will stop falling. When you start thinking you want to give a position a little room to work its way out of losing territory, you're on your way toward a trading debacle.
Mistake 8: Ignoring Your Stops It's wishful thinking, it's hoping against hope, and it's a good way to lose a lot of money. Unless you're omniscient, close the position when the price hits your stop. Take your loss.
Mistake 9: Enduring Large Loss To trade is to lose . No matter how good your trading system is, no matter how experienced you are, no matter which stocks you pick, you're going to have losing trades.
Mistake 9: Enduring Large Loss Your success as a trader depends on how you handle those losing trades. If you dispose of the losers quickly, you can become a very successful trader. But if you hold onto those losing positions, you can lose so much money that it may knock you right out of the trading business.
Source of Reference : Michael Griffis and Lita Epstein, Trading for Dummies , Willey Publishing
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