8 Trading Mistakes that Feel Right
Stockscores.com Perspectives for the week ending July 11, 2016
In this week's issue:
In This Week's Issue:
- Stockscores' Market Minutes Video - How Stocks React to News
- Stockscores Trader Training - 8 Trading Mistakes That Feel Right
- Stock Features of the Week - Long Term Reversals
Stockscores Market Minutes Video - How Stocks React to News
How stocks and markets react to news can often seem to make little sense. It is important to understand the other factors that affect how investors price in new and important information. That plus this week's regular market analysis: Click Here to Watch To get instant updates when I upload a new video, subscribe to the Stockscores YouTube Channel
Trader Training - 8 Trading Mistakes That Feel Right
In trading, our emotions are our enemy. They cause us to make mistakes that, with the benefit of hindsight, seem obvious. Yet, at the time we make these errors, it feels like we are doing the right thing.
Here are 8 common trading mistakes that relate to our emotional attachment to money.
Fail to Limit Losses - I have not yet met someone who is always right in the stock market. That means you and I are going to be wrong some of the time. What is important is what we do when we are wrong. When the stock market shows that your analysis was incorrect, sell! Move on, get out, forget about it. Small losses won't hurt you, using hope to justify holding a loser will.
Averaging Down - averaging down on a loser is buying more at a lower price, expecting the inevitable bounce that gets you out without a loss. This strategy will actually work a lot of the time, you just keep averaging down until the market reverses. However, when it fails to work, and you keep buying in to a stock's bungee jump that fails to bounce, you can lose everything. Without capital preservation, you are just a spectator.
Buying in to Emotion - it is tempting to buy more of a stock that is moving quickly higher. It is important to remember that when everyone is doing this, investors will inevitably pay too much. A simple rule is to not buy stocks that have run away from their trend line. You can buy stocks that have momentum, just wait for them to pull back to the trend line and buy them on short term weakness. Never chase.
Believing in Public Information - the stock market is efficient, it prices in all available information. That means the news release that you are reading has no value. The annual report has no value. So long as the general public has the same information as you, your decisions based on that information will provide random results.
Selling on Pull Backs - it is easy to be nervous with our winners because the feeling of having a winner turn in to a loser is not a nice one. So, we tend to sell our winners too early, getting out at the first sign of weakness to lock in the profit and give ourselves the congratulatory "you never go broke making a profit" speech. You have to maximize gains and learn to distinguish between the minor pull backs that are part of long term, money making trends and actual trend reversals. A trade is not successful until you have doubled your risk.
Taking Too Much Risk - emotion is the enemy of the trader. Cold hearted people, or at least those who do not care about the risk of the trade, are the best traders. To make sound decisions, you can not risk more on a trade than you are willing to lose. If you do, you will break your trading discipline and avoid selling losers when you are wrong or sell your winners too early.
Going Against the Mood of the Market - it is not easy to paddle a canoe up a river, against the current. It is also not easy making money on a stock when the mood of the market is against you. When considering a stock, I always first assess who is in control of the stock, buyers or sellers. To make money, you either have to trade with the group that is in control or pick the point where control changes from one group to another. Don't go against the mood of the market.
Trade Possibility, not Probability - I remember an advertisement for a lottery, it said, "Think of the Possibilities!." What if the lottery company suggested we think of the probabilities? We have all heard that we have a better chance of getting struck by lightning than picking the right numbers to win the lottery, but because we think of the possibilities, we continue to buy tickets. A lot of people approach the market the same way. They may look at a stock and describe all of the thing that could happen, how the company could find gold on a long shot mining exploration and how the stock could go rocketing higher. However, when you trade against probability, you are on the path to poverty.
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Stocks reversing their long term downward trends typically by breaking the downward trend line from a rising bottom. This week, I ran the Abnormal Breaks market scan and then checked the weekly chart for this pattern. Here are two examples that have good potential in the months ahead:Back To Top
1. CHRS
CHRS is having a strong price gain day on abnormal volume, breaking the downward trend on the weekly chart after forming a rising bottom. Support at $16.
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2. LCI
LCI has been building a rising bottom for the past 6 weeks and today is breaking out of that sideways pattern with strong volume, breaking the downward trend line on the weekly chart. Support at $24.25.
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References
Get the Stockscore on any of over 20,000 North American stocks.
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Strategies that can help you find new opportunities.
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Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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