Investing Mistakes and How to Minimize Them
Ah, those investing mistakes that everyone wishes hadn’t happened to them. Not all losing ventures in the stock market are due to foolishness. For a plethora of reasons, including reckless advice from the “experts”, emotional trading, misapplication of the basic stock investing concepts, and failure to follow a proven stock trading system all can lead to the same end. Here is a list of common errors to avoid, improving your results and limiting those investing mistakes:
1. Never invest without a clearly defined stock trading plan. A well-conceived plan will include considerations of time, risk-tolerance, and future income….and a proven system for success (such as the Japanese Candlestick stock trading method). A plan that follows these guides will steer clear of most investing mistakes.
2. Investors don’t stick to their best investment plan. All too often, investors will feel changes in the market and not have faith in their plan. Although investing is always referred to as "long term", it is rarely dealt with as such by investors who would be hard pressed to explain simple stock market basics. Again, a good investment plan including a strong system can help to evade most investing mistakes.
3. Investors fall prey to the “one-trick pony” method of investing. To think that a rising stock will continue to rise indefinitely, especially if it is a company to which the investor has ties, is fool’s gold. Remember, portfolio diversification is a hedge against investing mistake. Follow your system and take your profits according to your plan.
4. Too often, investors are stricken with "analysis paralysis”, overdosing on stock market information. Such an approach is confusing, frustrating, and leads to more investing mistakes. Something else is good to remember; sales pitches do not constitute research! Technical analysis can be dirty work, but the end result is usually worth the effort.
5. Investors frequently are looking for the “home run”, that shortcut to a huge profit which usually only leads to more investing mistakes. A beginner investing in the stock market will abandon a profitable investment plan to take a chance on securities that cause nothing but trouble. The fact is, a solid plan will likely improve risk reward ratios faster, and more securely, than that swing for the fence.
6. Many investors fail to respect the cyclical nature of the markets and buy the latest fad in securities at its highest price. They will abandon the plan and system that was improving their stock market results and in turn, create a “buy high, sell low” trend in their investing. Such investors usually don’t have to suffer long; a trend like this will quickly eliminate the beginner investing in the stock market and their investing mistakes!
7. Many investing mistakes will involve some form of unrealistic expectations for an investor’s portfolio. Successful traders find that the most consistent success in investing requires a trip down the path of reasonable goals and steady growth. Trusting your plan and system make this trip more enjoyable.
A mitigating factor in the problems that cause investing mistakes is frequently the sensationalism that follows investing. Media coverage of stock market data analysis has become akin to the sports coverage; somehow investing has been marketed like a sporting event, with winners and losers. While investors “win” or “lose” their profits or even their investment, the market is not competitive in that sense. An informed investor, with his plan and system in place, competes for profits, not a spot on the evening news. Picking stocks that make a profit, not winning or losing, is the ultimate reward for avoiding those investing mistakes.
Market Direction: The Dow has been nudging the top of the trading channel for the past two months. The past two days of trading took the Dow up through the top of the trend channel with a very decisive bullish candle. What should that tell us? The top of a trend channel was an obvious resistance level. The fact that they took the Dow up through that level with great conviction revealed the resistance level was not a factor anymore.
DOW
This provides two scenarios. Either the market is in a strong uptrend, breaking out of the trend channel, or this is the last gasp exuberant buying. Having the ability to interpret what candlestick signals reveal allows an investor to better analyze the trend progress from here. Stochastics are in an overbought condition but have been that way for the past month and a half. The next few days would indicate whether this is a breakout to the upside or the exuberant buying at the top. That can be identified fairly easily. A pullback in the next few days should show support at the up trending trend line. Keep in mind, once a resistance level is broken, it should then act as support. Continue to hold long positions but be prepared to take profits on a major reversal signal.
Stop Losses - With the markets in the oscillating uptrend, the top of the trend channel and the bottom of the trend channel become important technical levels. Sell signals at the top of the trend channel create higher incentives to take profits and/or adding short positions to the portfolio.
Adding short positions is used for downside protection. It can be seen every time the top of a trend channel was touched; the selling took the trend back down to the bottom of the trend channel. Probabilities say that the sell signal of the top of the trend channel make for better short positions. But those short positions usually do not last for more than a few days. That is with the prospect that the lower trend line will again act as support. However, the sell signals at the top of the trend channel provide no guarantee that the downtrend will not continue down through a bottom of the trend channel.
That makes covering short positions an easy decision. What signals appear when the lower trend channel is touched? If an indecision signal, such as a Doji or a Hammer is formed, positive confirmation would make a logical spot to cover the short position. What happens when the potential downtrend fizzles? Placing stop losses at common sense/logical levels is easily done using candlestick signals. Where is the level that indicates that the trend is not doing what was anticipated? That becomes a place to put a stop loss.
As seen in the ALKS chart, what appeared to be an excellent sell signal, the Bearish Harami, just as the price touch the 50 day moving average, was an excellent place to start shorting. However, the following day formed a Hammer signal. The stochastics show that they were not in the over bought conditions. What becomes the logical place to put a stop loss if you were short this position? Any trading above the high of the Hammer day.
ALKS
Why does that become a very simple stop loss process? Because the information that we know about the candlestick signals tell us what should occur the following day. The Bearish Harami at the 50 day moving average was a strong sell signal, with a mild modification that the stochastics hadn't quite reached the overbought condition.
The Hammer type signal forming at the 20 day moving average immediately reveals that the selling may not be as forceful as expected. If the Bearish Harami was the prevailing signal, what should we expect to see? Additional selling! If the Hammer signal at the 20 day moving average was going to be relevant, what should be expected the next day? More bullish sentiment. Witnessing more buying, coming up through the high of the Hammer signal, becomes a logical stop loss for a short position.
The analysis of candlestick signals anticipates high probability expected results. The confirmation of those results produce a very simple technique for placing stop losses. Everybody tells you to cut your losses short and let your profits run. However, very few people tell you “how” to cut your losses short and let your profits run. Candlestick signals make that process very easy to implement.
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The Candlestick Forum Staff