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Stock Trading Mistakes - Five to Avoid
by Dave Johansen
Here are some of the most common stock trading mistakes to avoid. Whether you are an experienced trader or not it's important to avoid the pitfalls of stock trading and have a disciplined trading plan.
Digging The BottomTrying to hit a stock exactly at the bottom is as hard as exiting a stock at the top. Stocks very rarely turn around in a 'v-shaped' bounce. Other investors looking for value may well dabble at a stock on a low but it will likely trade in a much lower range for some time.
It is therefore better to wait and track this new trading range only entering the market again when the stock breaks out of its range and heads decisively higher. Sure, you may not get in at the exact bottom but it's better to be safe than sorry.
Trying to Hit The TopAvoid stock trading mistakes by trying to time the exact top of a trading range for a stock.
Both tops and bottoms rarely arrive exactly when they are supposed to. Over-enthusiasm leads investors to keep buying a stock when there is no longer any fundamental reason to do so. Remember, the Dotcom boom of the late 1990s or the more recent boom of 2007.
As always it is far better to hold the positions you have and keep moving up your stops to lock in your gains. If something looks to good to be true it usually is and it's at this time you need to keep a close eye on your fundamental analysis.
Trading Against The TrendStock trading against the dominant trend can be easy to to do if you focus on too short a time frame.
Looking at a daily price chart may indicate a trend in one direction but, unless you are a day trader, it would be wise to first look at a longer term weekly chart to better understand in what direction the dominant trend is heading.
Regardless of the indications on the chart you are looking at always confirm your analysis by looking at a chart with a longer time period.And don't forget to be aware of where we are in the business cycle and how that impacts the stock you are trading in.
Trading Without A StrategyStock trading without a strategy is never a good idea. If you hear from a stock tip sheet or a TV program that a stock is hot, don't be tempted to pile in without proper analysis.
Maybe you've stumbled across a hot new product or gimmick that you feel sure will take off along with a company's share price.
By all means investigate but don't buy on a wing and a prayer. Conduct proper fundamental analysis of the company's share price. Look at the technical indicators and decide whether now is the time to buy or not.
Plan your trades as you would with any other stock pick with clear entry and exit prices. Formulate a trading plan and stick to it.
Trading Is A BusinessRemember, stock trading is a business and another common stock trading mistake is to take it personally.
Don't let a bad trade damage your self worth. OK, you made a mistake and these things happen. No-one is right all the time and a losing trade doesn't mean you are a terrible trader any more than a winning trade makes you the best stock trader in the world.
Don't fall in love with a stock either, no matter how much money it's made for you. If there is a profit to take, take it. Sure you want to be right and feel great when you are but nothing stays the same forever and you must be ready to ditch any stock at the first sign of trouble.
As ever make you plan and stick to it.
ConclusionTo avoid these common stock trading mistakes remember to treat trading as a business, plan an entry an exit strategy and understand you will never hit the exact top or bottom of a trading range.
About the Author
I'm Dave Johansen, co-owner of MarketCapMania.com, a website dedicated to the online stock trader. If you would like more information on online stock trading pay us a visit. We've got news, views, reviews, tips, advice and information!
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