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Three Mistakes A Trader Should Never Make

Published 05/21/2013, 10:25 PM

As traders and investors we deal with a lot of emotion each and everyday. Obviously, when a trade is working out in your favor you feel on top of the world. On the flip side, when a trade is going against you, it will make you feel terrible. Below I shall list the top three mistakes that most novice traders will make, read this and make sure you do not fall into these traps:

  1. Never fight the market. One of the biggest mistake that every trader will make at some point in their career is fighting the market. I remember back in 2005 when I was shorting housing stocks and getting stopped out for a loss constantly. According to my research, I truly believed that the housing stocks were about to top out, but my timing was wrong by six months, and it cost it me a lot of money. Eventually, the housing stocks topped out, but it was much later than I had originally expected. The lesson here is to not fight the market. Everything in life has a shelf life, often bull market rallies can last longer than many think. It is always best to probe short positions in bull markets and try and sell the lower highs. Picking tops is very difficult for the most savviest traders and investors.
  2. Always abide by the stop loss. Traders that do not use or have a stop loss before taking a position are crazy. A stop loss is the only form of insurance that a trader has in the stock market. Remember, as an independent trader you are not Warren Buffet, nor do you have his money. For example, in 2008 Mr. Buffet bought Goldman Sachs (GS) around $125.00 a share. Several months later the stock plunged to $48.00 a share. The average person cannot afford to hold a stock that declines this far against them. For every stock that declines 50.0 percent against you, you need a 100.0 percent move to the upside just get back to break even. Traders should also not risk more than 10.0 percent on any one trade. This rule alone will keep you in the business. The legendary trader Jesse Livermore swore by this rule and you should too. If you lose small you live to fight another day.
  3. Forget the news and rumors, just watch the charts. Price action is so important because it is real time and the one true leading indicator. So many times I hear people telling me about a new product, or drug that is about to come out, yet the stock moves lower. Forget the news and rumors, the patterns on the charts represent human emotion, they will serve you best in trading. Learn and understand everything there is to know about the technical chart patterns and you will be far ahead of the crowd which is always late to the party. For example, last September many traders were telling me about the new Apple television and i-phone that was in the works. I responded by saying, there is distribution in the stock and it is looking weak on the charts. As we all know, Apple declined sharply lower in the following months. The moral of the story, do not listen to the news just follow the charts.
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