Monday, November 17, 2014

Common Investor Mistakes - Tom Dorsey

Common Investor Mistakes
Below we have listed a few common investor mistakes.
Try to avoid making these mistakes with your investments.
Falling in love with a position. An account has limited capital, so
ask yourself if the position is the best one to be in here. Are you
tying up capital that can be put to better use elsewhere? Don't get
sucked into the fundamental story.that is, don't hold on to a
stock whose technical picture has deteriorated just because you are
intoxicated with the reasons for your choice.
Buying the stock right, but forgetting to sell it right. There
are two foul shots to make successfully with respect to investing.
You must buy the stock right, and then you must sell the stock
correctly. Therefore, once you buy a stock you must review it on
a regular basis; don't just forget about it. Attempt to sink both
foul shots.
Not having a game plan for investing. Investors will haphazardly,
especially in a strong market, pick stocks to buy, thinking that
the stock market is easy to beat. They fail to realize there is risk, not
only reward. Therefore, it is essential to have a game plan that
helps dictate what stocks to buy and when, and also tells you when
to sell or play defense.
Buying stocks that are extended. When you buy a stock that is
up on a stem, it increases your risk and diminishes your potential
reward. Rather, it is best to buy a stock when it pulls back closer to
support, thereby increasing the potential upside reward, and
diminishing the risk to the stop-loss point.
Taking small gains, but not being willing to take small losses.
Be willing to take small losses by adhering to your stop-loss points.
Avoiding large losses will keep you in the game. You will not be
right on every trade, so be willing to bail out and take the small loss
when the technical picture so dictates.
Buying a stock that is trending down, thinking that it is cheap, or a
value. Often, these types of stocks become an even better value
because they continue to fall in price. Ideally, it is best to stick
to stocks that are in an overall uptrend, trading above their bullish
support line and exhibiting positive relative strength. These
are the stocks that are in demand and should be considered for
Acting on poor advice, tips, and financial media hype. Many
investors try to get rich quick without doing their homework. They
rely on the TV or financial media to tell them what to buy. Instead,
take the time to educate yourself, to arm yourself with a game plan.
Then you will be able to make sound, informed decisions. Take
responsibility for your own success. Donft rely on get-rich-quick
schemes and rumors. Do your own research.
Getting emotional and not being able to stay objective. Any
investor knows that emotions can be your worst enemy. Try to stay
objective. The point and figure chart helps you accomplish this
because a picture paints a thousand words. When looking at the
chart, cover up the name of the stock. Make your decision on what
the chart is telling you, therefore taking the emotion out of knowing
the name of the stock.

From the book  Tom Dorsey's Trading Tips: A Playbook for Stock Market Success