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Wednesday, February 25, 2009

Trading Mistakes (Part 3)

-- 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.

-- Relying on gurus.

I'm spitting in my own rice bowl here, but you should not be letting some self-appointed market "gooroo" dictate or dominate your trading decisions. The most you should expect, or accept, from folks like me are a few trading ideas, a little technical analysis tutoring, and a bit of guidance in maintaining a solid trading discipline. You should not think of a market letter (ANY market letter) as a substitute for a personally managed portfolio. No one knows or cares about your personal circumstances like you do; how much money you have to invest, your tolerance for pain, your goals, your most suitable and comfortable time frame, etc. And you should be doing everything in your power to make Nick's Picks unnecessary and irrelevant to your trading, to learn enough not to need the likes of me anymore. Read some books. Take some courses. Buy some decent charting software and arrange for a data feed.

-- Thinking this market stuff is easy.

Don't confuse genius with a bull market. It's not that hard make money in a roaring bull market. Keeping your gains when the bear comes prowling is the hard part. Don't get cocky, but don't grovel either. You're not as smart as you think you are when everything is going great. But you're not as dumb as you think you are when everything is going to hell either. The market whips all our butts now and then. The whipping usually comes just when we think we've got it all figured out.

-- Thinking rather than looking.

One thing you should be thankful for is that you don't HAVE to come up with a reason for WHY the market is doing what it's doing. The talking heads on CNBC do because that's their job. I do too, because I know you expect it of me. But you don't. Just follow your chart work and let someone else do the pontificating. After all, who REALLY knows why stock ABC goes up 5 points on Monday while stock XYZ, in the same business, goes down 5 points? That's the great thing about technical analysis. You don't have to know. The price action is THE TRUTH. It's all you really need to know. Price doesn't lie. Price doesn't alibi. Price never complains and never explains. It is what it is. When XYZ goes up $5 on heavy volume, let Joe Hairdo on CNBC jabber on about what it all means. We KNOW what it means. It means XYZ went up $5 on heavy volume.

Pant...pant...pant.

These are just some of the mistakes traders make. There are lots more, but this has to end somewhere. These have been mostly generic in nature, applicable to fundamental investors as well as technical traders. One of these days I'll do another diatribe along these same lines, but confine it strictly to TA do's and don'ts. Until then, trade smart.


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