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Trading The Stock Market

Stock market commentary, analysis, insight and opinion of the RightLine Editors is available every Tuesday/Thursday evening & Saturday afternoon. The following is excerpted from the:

February 22, 2018 - The RightLine Report

Notes From The Editor

Thomas Sutton, EditorCommon Trading Mistakes...And How to Avoid Them (Part III)

In recent Reports we've looked at potholes and traps that can wreak havoc on even the most carefully-formulated trading strategies. Here are three more common mistakes for your consideration.

Mistake #6: Trading stocks like you're gambling in a casino

On the surface, trading and gambling seen to have a lot in common. You risk money to make money. Sometimes you're lucky, sometimes you're not. Occasionally you'll find yourself on a hot streak or losing streak. But dig deeper, and you'll find that Wall Street is a far cry from Vegas.

The most important difference? When trading, the only "house" advantage is the commission you pay your brokerage. The odds aren't inherently stacked against you. But traders sometimes make the mistake of being haphazard with their choices; they throw their money at a stock without really taking the time to think it through, or without using risk management techniques. This approach might work okay at the craps table, but it's ill-suited to trading.

Mistake #7: Averaging down

This goes hand-in-hand with a mistake we covered last week: holding on to losing positions. This trap is easy to fall into unless you have some serious discipline. It's human nature to look for the silver lining in a bad situation. But if you're holding a losing position, buying more shares at a cheaper price is rarely a good option.

Think of it this way: if the stock is already heading the opposite direction, then it's not behaving the way you thought it would. Something is amiss. Buying more shares and averaging down will only compound your losses if the equity continues to go against you. The better approach is to keep your original stop in place, and focus your resources on finding promising set-ups somewhere else.

Mistake #8: Overtrading

Constant trading can be tempting because you're more likely to hit a nice winner. However, you'll also be more likely to throw caution to the wind and be less selective when finding potential trades. And boy oh boy, do brokerages love this mistake; commissions can add up fast when you're overtrading, eating away at any profits you may have accumulated.

Frantic trading may be the bread-and-butter of daytraders, but it's ill-suited to those who use a longer timeframe. The better approach is to be picky, trading only when a stock meets your requirements. Also remember that sometimes - especially in a sideways or extremely choppy and unpredictable market - staying on the sidelines is the best option.

Here's to profits,

Kent Barton
Senior Analyst

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