There are a number of common mistakes traders make when trading stocks. A lot of these can be avoided with knowledge and practice but you must recognize the mistakes when they occur or avoid them altogether. Otherwise you will lose money and the only reason your trading is to make money.
1. I always avoid trading the runaway trains, this can also be called "do not chase". You see a stock on a nice trend then enter at your price, I usually wait for pullbacks and then enter at the price I want. Now and then I miss a trade and that's OK. You can also trade these pullbacks, if your already in and the stock goes crazy find a point to take profit or at least raise your stops and re enter on any pullbacks.
2. Averaging down is normally a bad idea. Usually you'll end up in the red for twice as many shares. You can reduce your cost basis but you've already read the chart and your previous entry point wrong. I will do this for short scalps when I am early and usually the trade turns out ok, I don't double down on a dying stock, instead I double up on winning stocks. This give you profit that offsets a stocks loss, also if your already trading a stock well, then keep trading it.
3. Set and keep stops before your trade.
No one likes to take a loss, they see the stop is going to be hit and cancel the sell. This is insane, you planned the trade a certain way, including the stop. Let it hit and re-evaluate whether or not you want to buy this stock again.
The same rules apply for exits on profits, always take your profit, exit when you hit your sell point. I just disobeyed this rule yesterday, I had the QQQQ at the low, profit of about 600, wanted to see if I could eek out some more gains so I held. Next think I know is I get distracted and recheck the stock to find that I'm back to even. The QQQQ closed with me about 600 in the red. This is the reason I'm writing about mistakes today.
When a stock is rising it's very tempting to raise your stops too close to the price and any pullback will see your stopped out.
4. Are you diversified?
Careful, you must be diversified, but don't over diversify. Its tough to monitor all markets and all trends including individual stocks during the day. I stick with certain stocks and the QQQQ now and then a stock gets slow to trade and I find a new one to trade. You all have so much time and only 2 eyes. Realize your limitations. Trading specific sectors is a concept a lot of traders enjoy, it helps them gauge specific trends for the overall type of stock they are trading i.e. oil, gold, tech etc. Nothing wrong with trading just one stock and learning it!
These 4 common trading mistakes are ones I confront on a weekly basis. I never confront #4 but a lot of traders who buy penny stocks come to me for advice seem to have trouble there. Hope this helps and make some money today!
