In today’s episode, you’ll discover the top 6 stock trading mistakes that you must avoid.
So tune in right now…
Hey, hey, what’s up my friend? In this episode, I want to talk about the top 6 stock trading mistakes that you must avoid.
Mistake #1: You try to buy low and sell high in the stock market
When a stock has fallen in price maybe into its 52-week lows or multi-year lows, so you think that the stock is cheap and it has to go up higher since most traders think – what goes down must go up.
But here’s the thing, based on the research that I’ve done, stocks that have fallen in price into their 52-week lows, are stocks that tend to underperform the market.
The reason why stocks are trading near their 52-week low or their multi-year lows is because fundamentally, those stock sucks. Of course, there are stocks out there that eventually rebound back higher from the lows.
But we’re talking about probability here. More often than not, stocks that are lowly-priced or have fallen a lot in price, tends to remain low and might even get delisted altogether.
So what should you do instead? Well, the solution is to buy stocks which show signs of strength. Look to buy stocks at their 52-week highs or are trading near their multi-year highs.
Those are stocks that are having better odds to beat the market. Again I’ve done statistical research on this and it’s far more profitable to buy into strength in the stock markets as compared to buying into weakness.
So that’s the first thing, avoid trying to buy low and sell high.
Mistake #2: You go long on stocks when the overall market is bearish
Let’s say you trade the US stock markets and the S&P 500 is below the 100-week moving average and is in a downtrend.
If you were to buy stocks when the overall market is in a downtrend, you’re fighting against the tide.
A rising tide indeed lifts all boats, so if the overall stock market is bullish, most stocks in there will continue to trade higher. The opposite is also true, if the overall market is bearish, most stocks will continue to trade lower.
So if the overall market is bearish, you want to avoid buying stocks and hold on to cash instead. This way, you don’t have to swallow and the drawdown.
One way to define whether the overall market is bullish or bearish is to use a simple tool like the 100-week moving average.
If the stock market index is below the 100-week moving average, then we can say that the market is bearish and we’ll sell all our positions to remain in cash. This technique will be able to help you avoid that painful 50 %, 60% drawdown when the market collapses.
Mistake #3: Going all-in into a stock
No matter how confident you are, never go all-in into one stock. Because you’ll never know what goes on behind the scenes.
The stock’s technicals and fundamentals could be good, but you’ll never find out things like if the management is bad, or not. Nobody will give you a phone call to tell you, “Hey, things are really bad down here, it’s time to sell the stock.”
This is why you never go all-in into one stock. Even Warren Buffett for example, whose portfolios consist of 40, 50 stocks, who is the world’s best investor, who manages a ton of money, who has insider contacts, yet he still doesn’t go all-in into just one or two stocks.
Instead, he diversifies across a basket of stocks because you’ll never know which are the ones that are going to be the mega winners and which are the ones to cut the losses and move on.
You want to be trading multiple stocks across multiple industries as well. That’s the third thing – never go all-in into one stock.
Mistake #4: No plan for exits
Often, when traders or investors buy a stock, they usually buy based on market sentiments. When the market is bullish and everybody is putting money into the stock markets, the stock goes up and everyone is happy. But when do they sell the stocks?
Well, they sell the stocks only when the stock prices collapse by 30% or 40% and they start to panic, thinking if they should continue holding or to sell altogether.
A simple way you can avoid this is to have a plan ahead of time for when you’re going to sell the stock before you even buy it. Because once you have a planned exit, then you will never get caught off guard again and be forced to sell when you can no longer take the pain anymore.
A lot of people sell the stock only when they can no longer take the pain and they sell at the bottom. Then when no one is left to sell, the market rebounds and rallies higher.
If you have a planned exit, maybe a trailing stop loss or a fixed profit target based on whatever valuation metrics that you’re using, you can sell the stock at a predetermined price that you have set.
Mistake #5: You get swayed by news and opinions
Here’s the thing about stocks, there is a lot of news and opinions out there. For every stock, you can find both bullish and bearish news on the internet. And it’s a problem when you have too much news out there. How do you make sense out of this madness?
Or if you’re a technical trader, there are so many technical trading tools from A to Z, RSI, stochastic, MACD, price action, chart patterns, candlestick patterns, trendline, support resistance, etc. How would you know which tool to use or focus on?
This is the same problem as relying on news, opinions and fundamentals. There are simply too much out there.
You can easily get swayed by different news and opinions depending on who is bearish and who is bullish. Your job as a trader or an investor is to filter the news that you’re using.
If you use news in your trading or investment decision, you must filter out the type of information that you use to make your buying and selling decision. I can’t say which is the best because I don’t use news in my trading at all.
But if you do, you must filter them and only use the ones that are relevant to your needs and ignore everything else.
It’s like trading using technical analysis. I don’t use everything and anything, I simply use a few proven techniques and concepts that have worked for me and I pretty much ignore everything else.
And whether you’re a fundamentals guy, a sentiments guy or whatever guy, you have to do the same thing and discard the noise to just focus on the stuff that matters to you. Don’t get swayed by news and opinions because most of them are pretty much irrelevant.
Mistake #6: You’re trying to short stocks
Now there’s nothing wrong shorting stocks. Some traders are profitable doing this in the long run.
But here’s the thing, if you’re new to trading and you’re trying to short the stock market you are fighting against the tide. Because in the long run, stock markets are in an uptrend. Just pull up any stock market index over the last 30, 40 years you can see they’re in a long term uptrend.
So by shorting stocks, you’re fighting against this long term trend. Not that it can’t work but the odds are against you.
If you are still trying to make money from the stock markets, my suggestion is to either keep on the long side or hold on to cash.
Don’t try to short the stock markets because again, in the long run, it’s usually in a long term uptrend. And usually when there’s a retracement or a pullback, the steeper it is, the stronger the subsequent rally will be
So if you’re trying to short stocks and if you short them too late, you’ll get caught off guard on the bounce higher and it will be painful for you.
Here’s a quick recap…
Here are the 6 mistakes to avoid when you’re trading stocks:
- Buying low and selling high
- Going long when the overall market is bearish
- Going all-in into one stock
- Trading without a planned exit
- Getting swayed by news and opinions – focus on the stuff that matters to you
- Shorting stocks
With that said, I wish you good luck and good trading. I will talk to you soon.