Re: Trading Mistakes .....by Proffitt
Below,the continuation......
Saint
Below,the continuation......
Saint
-- Bottom fishing/Catching falling knives.
Many of the daily e-mails I get are of the following type: "Nick, Zowie.com is down 23 points today. Time to buy?!!!" My answer is almost always the same. "Put your pants on, Spartacus. No!" Don't ANTICIPATE bottoms. It's tempting to try to pinpoint an exact low, especially if you're working with indictors like Fibonacci fan and time lines, cycle studies, regression channels, even plain old lateral support points. But it's almost always better to let the stock find its bottom on it's own, and then start to nibble. Just because a stock is down big doesn't mean it can't go down even bigger. In fact, a major multipoint drop is often just the beginning of a larger decline. It's always satisfying to catch an exact low tick, but when it happens it's usually by accident. Let stocks and markets bottom and top on their own and limit your efforts to recognizing the fact "soon enough." Nobody, and I mean nobody, can consistently nail the bottom tick or top tick. Those who try usually get burned.
-- Averaging down.
Don't do it. For one thing, you shouldn't even have the opportunity, because you should have sold that dog before it got to the level where averaging down is tempting. The pros average UP, not down; they got to be pros because they added to winners, not losers. And speaking of averaging UP, there's a right way to do it. And doubling your position is not it. Rather, you should add 1/2 your original stake. If other words, if you already own 100 shares and want to bolster your position, you buy 50 shares. If you later decide to add more, you add 25 shares, etc. Why you should do it this way is too long to go into here, but that's the way the math works out best for you.
-- Shorting bulls and buying bears.
Yes, there are stocks that will go up in bear markets and stocks that will go down in bull markets, but it's usually not worth the effort to hunt for them. The vast majority of stocks, some 80+%, will go with the market flow. And so should you. It doesn't make sense to counter trade the prevailing market trend. If you're worried about a short term pullback, simply cut back on your trading, take a few profits, and build up your stash of cash. Let that money earn its 5% in the money market until the squall has passed.
-- Confusing the company with its stock.
There are some fine companies with mediocre stocks, and some mediocre companies with fine stocks. Try not to confuse the two. This is, at heart, a fundamental analysis versus technical analysis issue. Some stocks simply have excellent trading characteristics while others don't. Maybe it's a matter of liquidity, or a fanatical message board following, or a daytrading clientele, or whatever. Take Amazon.com for example. Is the company a good one? Who knows? Not me. But the stock is. I wouldn't want to have to hold it for 20 years, but I sure don't mind trading it a few days at a time, the "right" days. That sucker moves. Baby Bells are at the other end of the spectrum. Fine companies for the most part. Wouldn't mind owning one for 20 years. But you have to pick your spots when you go to trade them, because a measly 3 point move in a single session is huge for a Baby Bell. Also remember this: even the stock of a great company can go through a bad patch. IBM is a great company today, with its stock selling at 124, and it was a great company five years ago, when its stock was selling at 13.
-- Falling in love with a "story."
This is related to confusing the company with its stock. There are a lot of intriguing "stories" out there, but they don't always translate into instant riches. Iomega was such a "story" stock. The story was that the company's Zip drive was going to replace the floppy in the world's computers. The stock ran straight up to the sky to wait for the story to come true. And for the most part, IOM's story DID come true (many stories don't, witness the Y2K stocks), but the stock gave back most of its gains anyway. Turns out it wasn't that much of a story after all. In other cases, the story comes true but the stock you've bet on isn't the story teller. Witness the laser vision "story." A number of companies were hyped as the category killer, but only one, VISX, made its stockholders real money. And how about satellite communications? Great story, eh? Tell it to those who loaded up on Iridium's stock.
-- Following the leader.
Just as money tends to flow into last year's top mutual fund (sure to be next year's underachiever), people tend to chase the high flying momentum MO-MO stocks, succumbing to the buzz and getting in AFTER the stock has already jumped 80% and inevitably just before it drops 60% as the early buyers take their profits by selling their shares to the "greater fool," you. Yes, you can make a quick buck chasing momentum, but you can lose it even quicker. You can never be sure there's a greater fool coming in after you, and that could make you the "greatest fool."
-- Buying IPOs.
An astonishing number of people don't understand how IPOs work. YOU are not really buying an IPO when you buy the stock on the first day of public trading when it opens at $75. Those who REALLY bought the IPO were those who got their shares for $10, well before the public trading began. For the most part, only institutions or megamillionaire private investors have access to IPOs. There have been a few exceptions, but it's almost universally dumb to buy a hot IPO on its first day of public trading. As for those few times when the average investor IS offered shares in an IPO before public trading begins, my advice is to pass. My rule of thumb on IPOs is: If you want it, you can't get it, and if you can get it, you don't want it.
-- Finding the Holy Grail.
Technicians regularly fall into periods where they tend to favor one or two indicators over all others. No harm in that, so long as the favored indicators are working, and keep on working. But the analyst should always be aware of the fact that as market conditions change, so will the efficacy of their indicators. Indicators that work in one type of market may lead you badly astray in another. You have to be aware of what's working now and what's not, and be ready to shift when conditions shift. There is no Holy Grail indicator that works all the time and in all markets. If you think you've found it, get ready to lose money. Instead, take your trading signals from the "accumulation of evidence" among ALL of your indicators, not just one.
-- Overtrading.
The Picks Port commits this sin on a regular basis, but that's mostly because of the nature of the beast. I have to be more short term oriented than I'd prefer to be because you, my subscribers, tend to be more short term oriented than you probably should be. Daytrading, of course, is the epitome of overtrading. Most people just are not equipped, emotionally, intellectually, or mechanically, to day trade and statistics tell us that most are not successful at it. If you are not making money at daytrading but keep on doing it anyway, you should examine your motives. If it's the action you crave, take up skydiving. It's safer and cheaper.
-- Excessive tape watching.
I get a kick out of people who insist that they're intermediate or long term investors, buy a stock, then anxiously ask whether they should bail the first time the stocks drops a point or two. Likely as not, the panic was induced by watching the tape, or hearing some talking head on CNBC. Watching the ticker can be fun. It can be mesmerizing. But it can also be dangerous. It leads to emotionalism and to hasty decisions. Try not to make trading decisions when the market is in session. Do your analysis and make your plan when the market is closed and the White Noise of the television and the ticker is absent, then calmly execute your plan the following day. You have your stop and your target. So go take a nap, or go to the movies, or mow the lawn. The only time you should be scrutinizing the tape is when you're looking for an immediate entry or exit point for a trade. Otherwise, do your blood pressure a favor and tune out.
-- Being undercapitalized.
If you have less than $50,000 to invest, you'd probably be better off in a mutual fund rather than trading individual stocks. To get proper diversification with a fully invested exposure you need at least 10 stocks. You do the math.
-- Letting the tax tail wag the stock dog.
Don't let tax considerations dictate your decision on whether to sell a stock. Pay capital gains tax willingly, even joyfully. The only way to avoid paying taxes on a stock trade is to not make any money on the trade.
Many of the daily e-mails I get are of the following type: "Nick, Zowie.com is down 23 points today. Time to buy?!!!" My answer is almost always the same. "Put your pants on, Spartacus. No!" Don't ANTICIPATE bottoms. It's tempting to try to pinpoint an exact low, especially if you're working with indictors like Fibonacci fan and time lines, cycle studies, regression channels, even plain old lateral support points. But it's almost always better to let the stock find its bottom on it's own, and then start to nibble. Just because a stock is down big doesn't mean it can't go down even bigger. In fact, a major multipoint drop is often just the beginning of a larger decline. It's always satisfying to catch an exact low tick, but when it happens it's usually by accident. Let stocks and markets bottom and top on their own and limit your efforts to recognizing the fact "soon enough." Nobody, and I mean nobody, can consistently nail the bottom tick or top tick. Those who try usually get burned.
-- Averaging down.
Don't do it. For one thing, you shouldn't even have the opportunity, because you should have sold that dog before it got to the level where averaging down is tempting. The pros average UP, not down; they got to be pros because they added to winners, not losers. And speaking of averaging UP, there's a right way to do it. And doubling your position is not it. Rather, you should add 1/2 your original stake. If other words, if you already own 100 shares and want to bolster your position, you buy 50 shares. If you later decide to add more, you add 25 shares, etc. Why you should do it this way is too long to go into here, but that's the way the math works out best for you.
-- Shorting bulls and buying bears.
Yes, there are stocks that will go up in bear markets and stocks that will go down in bull markets, but it's usually not worth the effort to hunt for them. The vast majority of stocks, some 80+%, will go with the market flow. And so should you. It doesn't make sense to counter trade the prevailing market trend. If you're worried about a short term pullback, simply cut back on your trading, take a few profits, and build up your stash of cash. Let that money earn its 5% in the money market until the squall has passed.
-- Confusing the company with its stock.
There are some fine companies with mediocre stocks, and some mediocre companies with fine stocks. Try not to confuse the two. This is, at heart, a fundamental analysis versus technical analysis issue. Some stocks simply have excellent trading characteristics while others don't. Maybe it's a matter of liquidity, or a fanatical message board following, or a daytrading clientele, or whatever. Take Amazon.com for example. Is the company a good one? Who knows? Not me. But the stock is. I wouldn't want to have to hold it for 20 years, but I sure don't mind trading it a few days at a time, the "right" days. That sucker moves. Baby Bells are at the other end of the spectrum. Fine companies for the most part. Wouldn't mind owning one for 20 years. But you have to pick your spots when you go to trade them, because a measly 3 point move in a single session is huge for a Baby Bell. Also remember this: even the stock of a great company can go through a bad patch. IBM is a great company today, with its stock selling at 124, and it was a great company five years ago, when its stock was selling at 13.
-- Falling in love with a "story."
This is related to confusing the company with its stock. There are a lot of intriguing "stories" out there, but they don't always translate into instant riches. Iomega was such a "story" stock. The story was that the company's Zip drive was going to replace the floppy in the world's computers. The stock ran straight up to the sky to wait for the story to come true. And for the most part, IOM's story DID come true (many stories don't, witness the Y2K stocks), but the stock gave back most of its gains anyway. Turns out it wasn't that much of a story after all. In other cases, the story comes true but the stock you've bet on isn't the story teller. Witness the laser vision "story." A number of companies were hyped as the category killer, but only one, VISX, made its stockholders real money. And how about satellite communications? Great story, eh? Tell it to those who loaded up on Iridium's stock.
-- Following the leader.
Just as money tends to flow into last year's top mutual fund (sure to be next year's underachiever), people tend to chase the high flying momentum MO-MO stocks, succumbing to the buzz and getting in AFTER the stock has already jumped 80% and inevitably just before it drops 60% as the early buyers take their profits by selling their shares to the "greater fool," you. Yes, you can make a quick buck chasing momentum, but you can lose it even quicker. You can never be sure there's a greater fool coming in after you, and that could make you the "greatest fool."
-- Buying IPOs.
An astonishing number of people don't understand how IPOs work. YOU are not really buying an IPO when you buy the stock on the first day of public trading when it opens at $75. Those who REALLY bought the IPO were those who got their shares for $10, well before the public trading began. For the most part, only institutions or megamillionaire private investors have access to IPOs. There have been a few exceptions, but it's almost universally dumb to buy a hot IPO on its first day of public trading. As for those few times when the average investor IS offered shares in an IPO before public trading begins, my advice is to pass. My rule of thumb on IPOs is: If you want it, you can't get it, and if you can get it, you don't want it.
-- Finding the Holy Grail.
Technicians regularly fall into periods where they tend to favor one or two indicators over all others. No harm in that, so long as the favored indicators are working, and keep on working. But the analyst should always be aware of the fact that as market conditions change, so will the efficacy of their indicators. Indicators that work in one type of market may lead you badly astray in another. You have to be aware of what's working now and what's not, and be ready to shift when conditions shift. There is no Holy Grail indicator that works all the time and in all markets. If you think you've found it, get ready to lose money. Instead, take your trading signals from the "accumulation of evidence" among ALL of your indicators, not just one.
-- Overtrading.
The Picks Port commits this sin on a regular basis, but that's mostly because of the nature of the beast. I have to be more short term oriented than I'd prefer to be because you, my subscribers, tend to be more short term oriented than you probably should be. Daytrading, of course, is the epitome of overtrading. Most people just are not equipped, emotionally, intellectually, or mechanically, to day trade and statistics tell us that most are not successful at it. If you are not making money at daytrading but keep on doing it anyway, you should examine your motives. If it's the action you crave, take up skydiving. It's safer and cheaper.
-- Excessive tape watching.
I get a kick out of people who insist that they're intermediate or long term investors, buy a stock, then anxiously ask whether they should bail the first time the stocks drops a point or two. Likely as not, the panic was induced by watching the tape, or hearing some talking head on CNBC. Watching the ticker can be fun. It can be mesmerizing. But it can also be dangerous. It leads to emotionalism and to hasty decisions. Try not to make trading decisions when the market is in session. Do your analysis and make your plan when the market is closed and the White Noise of the television and the ticker is absent, then calmly execute your plan the following day. You have your stop and your target. So go take a nap, or go to the movies, or mow the lawn. The only time you should be scrutinizing the tape is when you're looking for an immediate entry or exit point for a trade. Otherwise, do your blood pressure a favor and tune out.
-- Being undercapitalized.
If you have less than $50,000 to invest, you'd probably be better off in a mutual fund rather than trading individual stocks. To get proper diversification with a fully invested exposure you need at least 10 stocks. You do the math.
-- Letting the tax tail wag the stock dog.
Don't let tax considerations dictate your decision on whether to sell a stock. Pay capital gains tax willingly, even joyfully. The only way to avoid paying taxes on a stock trade is to not make any money on the trade.
