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In today’s episode, you’ll discover the top 5 newbie mistakes you must avoid when trading stocks.
So listen to it right now…
Resources
The 200 Day Moving Average Strategy Guide
The Trend Trading Strategy Guide
Transcript
Hey, hey what’s up my friends?
In today’s episode, I want to share with you the top 5 beginner’s mistakes to avoid when trading the stock markets.
Newbie mistake #1: Buying stocks in a downtrend
According to research by Larry Connors who had done extensive testing in the stock markets, he found that stocks above the 200-day moving average tend to have a positive median return.
This means that stocks above the 200-day moving average tend to continue moving higher.
Likewise, when stocks below the 200-day moving average, tend to have a negative median return. This means stocks below the 200-day moving average tends to continue moving lower.
This is why you don’t want to be buying stocks which are in a downtrend because it’s likely to continue heading lower.
So a very simple technique that you can use is to only buy stocks when it’s above the 200-day moving average. This ensures that you are buying stocks which are in an uptrend.
Newbie mistake #2: Trading penny stocks
After all, that’s where the big money-making opportunity seems to be, thinking the stocks can explode up 50 to 100% within a few hours or a few days. But the thing about penny stocks is:
1. There’s low liquidity for penny stocks
This means that sometimes when you want to get out of the trade, you can’t get out at a price you want because there’s no seller or buyer at that price point regardless of whether you’re long or short.
This could cause you great problems if you can’t get out of a stock that you want to get out of.
2. Penny stocks are easily manipulated
Because of their low liquidity, the prices can be pushed up really high, a few 100% just like that. And when you chase such a stock, guess what? This is when the stocks make a pullback or even a reversal.
The last thing you want to do is to be buying the absolute highs. Unless you’re sure of what you’re doing, don’t trade penny stocks. Especially when you’re new to stock trading.
Go with large-cap stocks which move slower. You have more time to make decisions, and you can get out of your trades be it buying or selling at pretty much any time you want.
Newbie mistake #3: Buying into laggards
In my early years of trading, I realized that in the Singapore market, the STI seems to be lagging behind the US stock market. And I was thinking…
“Okay, that’s a good thing. I should be buying more of the Straight Times Index because it’s lagging behind the US markets. So when it catches up, there’s a huge price increase potential that I could profit from.”
But guess what? I bought the laggard and it stays a laggard for the next few years. So if the stock is a laggard, or if a sector is a laggard, there’s usually a good reason for it. If you want to trade stocks, indices, ETFs, or whatever, focus on buying the stronger ones.
Those are the ones that tend to outperform the market from a trading standpoint. If you buy the laggards like I did, it tends to remain a laggard for the next few months or even years. Focus on buying strength, not weakness.
Newbie mistake #4: Taking a huge position into earnings
Because the thing about earnings is you have no idea whether the price of the stock will go up or down. The share price can go up on bad news and go down on good news. How do you explain it?
It’s all about perspectives in the markets. It’s all about people’s beliefs and expectations in the market. Not just the news but expectations towards the news. And you can’t predict how people will react to that piece of news.
When you have a huge stock position, you don’t want to be holding the stock position into earnings, especially if it’s something that could rattle the share price up and down. Be aware of it. Don’t hold a huge position into earnings.
If you want to hold the position fine, trim it down to a comfortable level where you can sleep peacefully at night.
Newbie mistake #5: Buying during a bear market
This means if the market is in a recession, you don’t want to be buying stocks. You want to just hold onto cash.
As I’ve shared with you earlier, if the stock is in a downtrend, it tends to continue moving lower over time and it’s the same for the general stock markets. If the S&P500 is in a downtrend, then most stocks tend to be in a downtrend.
It’ll be better to hold onto cash during such period.
Let’s do a quick recap…
Recap
- Avoid buying stocks in a downtrend.
- Avoid trading penny stocks. Focus on large-cap stocks.
- Don’t buy laggards or weak stocks. Focus on buying strength.
- Don’t take a huge position into earnings because you never know how the earnings will turn out to be nor how the market will react to it.
- Don’t long stocks during a bear market. It’s much better to hold onto cash or to trade some other markets altogether which are more favourable to you.
With that said, I wish you good luck and good trading. I will talk to you soon.