Trading for Dummies® 2nd Edition

Chapter 21. Ten (Or More) Huge Trading Mistakes

In This Chapter

• Trying to trade tops and bottoms (no, this isn't X-rated)

• Becoming attached to your trading systems and your stocks

• Making decisions on the fly

• Losing too much

This chapter introduces you to ten (more, actually) huge trading mistakes that befall experienced and novice traders. We offer suggestions for helping you recognize the mistakes and for avoiding and even correcting them.

Fishing for Bottoms

Bottom fishing — trying to catch a stock as it bottoms out — is a great way to get soaked and lose a bucketful of money. In a bear market, stocks get much cheaper than most of us ever expect or want. They won't stop falling until they've run out of gas.

The psychology of a bear market is perverse. As long as traders remain interested in a stock, many are the moments when it seems like the stock may recover. The thing is, stocks rarely turn on a dime and head higher. Only after the momentum crowd loses interest does the stock's downward price slide end. When value investors, who can't resist a bargain, begin nibbling, the stock begins to stabilize; however, it also may spend a very long time bouncing around in a trading range.

Traders have few, if any, reasons for entering the market when a stock is trading in a range. Your best opportunity for profit occurs when the stock breaks out of its trading range. Chapter 9 shows how to identify these trading-range breakout patterns. Instead of risking your trading capital on unreliable bottoming ...