The most common stock trading pitfalls

First you need to be able to recognise them and you will then be better placed to avoid them.

Runaway Trend Equals Runaway Train

You should always avoid trading a runaway trend. If you have missed your planned entry price for a stock you are following, it is often better to wait rather than try to enter a position as the trend accelerates.

More than likely the stock will be pulled back and again test the trend breakout point allowing you to enter at a price closer to your original desired entry point.

If you are already holding a position in the stock just revise your exit point upwards and adjust your stops accordingly. Consider reducing your position to leave as much profit in the trade as possible.

Averaging Down

Averaging down when stock trading is usually a bad idea despite what many investment advisors may tell you.

It’s supposedly a good way to reduce your cost base but we feel it’s a way of throwing good money after bad. A good stock trader sells losers not buys into them!

However, averaging up or ‘pyramiding’ is a good practice to adopt. Buying more of a stock that is trending up can never be a bad idea. Just be aware not to over expose yourself to one particular stock in your portfolio.

Ignore Your Stops At Your Peril!

Ignoring your stops when stock trading is probably the easiest and most common stock trading mistake.

It’s so easy to talk yourself out of obeying your stops both on the upside and downside.

When a stock is rising it’s very tempting to raise your stops too close to the price and any pullback will see your stopped out.

Conversely, when a stop is falling, unless you stick to your stops you are really entering the realm of wishful thinking that a stock will rebound above the point you should have sold at.

Trust your technical analysis and stick rigidly to your stop loss planning.

You will lose at stock trading, that is the nature of the business. How you manage those losing trades will ultimately be the key to your overall success. Cut your losses quickly and let the winners ride as long as possible.

Dont’ Over Diversify

Diversify when stock trading as everyone will tell you. However it is just as big a stock trading mistake to diversify too much as too little.

There are only so many hours in the day and you are just one person, so there will be a limit on how many positions you can manage and monitor.

That limit will vary from person to person so you need to find a level you are comfortable with.

It is far better to manage a small number of positions successfully than to have your fingers in too many pies to the extent that you cannot possibly keep track.

Start with four of five positions and then work your way up rather than the other way around.

Conclusion

To steer a path clear of these stock trading pitfalls you need a stock trading plan, a plan you will stick to. Avoid jumping aboard the runaway train, don't stretch your resources too far and stick rigidly to your trading stops.