Ten (or More) Huge Trading Mistakes
Acknowledgement: Trading for Dummies, Griffis, Epstein, Wiley Publishing, Inc., 2004
More actually! Huge trading mistakes that befall experienced and novice trader. Included are some items to recognize, mistakes and ways to avoid them. Any additional suggestions to help steer away from these pitfalls would be appreciated in reply.
I. Fishing for Bottoms.
- In a bear market stocks get much cheaper than most of us ever expected or wanted. They won't stop falling until they've run out of gas.
- There are few good reasons for buying stocks when it is stuck in a trading range. Your best opportunity occurs when the stock breaks out of it's trading range, thus, wait until you are sure.
II. Timing the Top.
- Tops and bottoms share something in common. They rarely arrive when they're supposed to.
III. Trading Against the Dominant Trend.
- Confirm your analysis by looking at the charts that are one time period higher i.e., if you are looking at daily charts, confirm your analysis on the weekly charts.
- Always know which part of the market cycle you are in.
IV. Winging It.
- If someone says a stock is hot, it's only a reason to look into the fundamental and techinical conditions of the stock, but not a reason to buy it. You can always buy it if futher analysis confirms it's the right thing to do.
V. Taking Trading Personally.
- You can't let a bad trade get to you. The market isn't out to get you; it's out to get your money. Get used to it.
VI. Falling In Love.
- Trading is like a business. Stocks are your inventory. Don't fall in love with your inventory. They are there to sell, at a profit if possible.
VII. Using After-Hours Market Orders.
- You are likely to pay a lot more than what you wanted, or sell for considerably less using after-hour orders.
VIII. Chasing a Runaway Trend.
- If you miss the entry point for a stock that you want, waiting is better than entering a position as a trend accelerates. Often a stock will pull back and test the breakout point. Wait for that point, or wait for the stock to take a short breather after it's first leg up.
IX. Averaging Down.
- Averaging down is really merely a techinique to throw good money after bad.
X. Ignoring Your Stops.
- When you start thinking you want to give a position a little more room to work it's way out of losing territory, you're on your way toward a trading debacle.
- Close your position when the price hits your stops.
XI. Diversifing Badly.
- Exposing all your capital in one trade is a bad idea, and so is trading hundreds of stocks simultaneously.
- You may start with a dozen and settle on six or so. You could re-create the S&P 500, but to buy and sell that position would cost a bundle.
XII. Enduring Large Losses.
- Your sucess depends on how you handle losing trades. If you dispose of the losers quickly, you can become very sucessful. If you hold onto losers you can lose so much money that it may knock you out of trading.
A loss of........% Gain to Recover.
5%...............5.2%
10%.............11.1%
25%.............33.3%
50%.............100%
75%.............300%
100%............Game Over
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