NEVER do these 10 things + 3 Trading Stocks

NEVER do these 10 things + 3 Trading Stocks
Written by Tyler Bollhorn - StockScores.com
Monday, 17 May 2010 01:08
Never Do These ...
Stockscores.com Perspectives for the week ending May 15, 2010
In this week's issue:
Weekly Commentary
Strategy of the Week
Stocks That Meet The Featured Strategy
Trading successfully requires winning the constant battle against your emotions. Normal people
have a hard time beating the stock market because their emotional responses to fear and greed
get the better of them. To help win these battles, there are some rules that should never be
broken. Here are ten rules that I think are important, break them at your own peril:
1. Never Average Down
Averaging down is the practice of increasing your position in a stock when your initial position is
losing money. Some misguided traders think that they can trade their way out of a loser by
buying more at cheaper prices, allowing their average cost to go down so that their break even
point is lower. Admittedly, this practice will work a lot of the time. The problem is that when it
does not work, it can completely wipe you out. Without capital, you can not trade.
2. Never Believe in Dreams
Dreams are for Disneyland, they have no place in your trading. The stock market does not
serve free lunch, there is no easy money and fast and easy profits in the market are just short
term loans. If you do not have a well tested and thought out trading plan then you will lose
eventually. I have seen many people make large sums of money because they got lucky but
eventually gave it all back.
3. Never Take Trades with a Negative Expected Value
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NEVER do these 10 things + 3 Trading Stocks
Written by Tyler Bollhorn - StockScores.com
Monday, 17 May 2010 01:08
I have seen many traders make money on trades that they should not have. They think they are
smart trades but they are really only lucky trades. If you make $1000 on a trade where you risk
losing $5000, is that really a good trade? Good trades are those where the upside potential
outweighs the downside risk, a trade that will make you money if you do it many times. To
understand the expected value of a trade, you have to know the probability of success and the
potential profitability if you succeed. A trade that has a 90% chance of making $1 and a 10%
chance of losing $10 is not better a trade worth taking. A trade with a 20% chance of making
$10 and a 90% chance of losing $1 is worth taking.
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NEVER do these 10 things + 3 Trading Stocks
Written by Tyler Bollhorn - StockScores.com
Monday, 17 May 2010 01:08
4. Never Trade on Public Information
The stock market is efficient most of the time. That means it does a good job of pricing in all
available information. A stock that is worth more because they announce a major breakthrough
in their business will see its stock price go up to reflect that new information. Once the market
has priced in that new information, there is no reason to base a trading decision on it.
5. Don't Listen to Biased Sources
There are a lot of people telling investors what they should do and most of them have a bias.
Company insiders, stock promoters, newsletter writers, message board posters, media
reporters, financiers, brokers, friends and shareowners all have the potential to be biased. I will
never understand why people phone the investor relations department at companies to ask
about the business. Do they expect company staff to tell them bad things? The market itself is
the only source you can count on to be truthful, listen to what the market says through the stock
chart.
6. Don't Ignore Your Portfolio
People don't like pain and when they fear losses in their portfolio they often choose to ignore it.
Putting your head in the sand does not make the problem go away, you are better to face the
truth and do something about it. If your stocks are going down too much, sell them.
7. Don't Trade to Make Back Losses
Since we don't like pain we will often do whatever we can to make the pain go away. A
dangerous time to trade is right after a big loss because we are desperate to make the pain go
away. As a result, we take marginal trades, we trade like gamblers. This usually leads to more
losses.
8. Don't Be Patient With Losers
No one is right all of the time in the stock market. That means losing trades are part of trading.
What is important is to not let your losers grow in to big losers because big losers require many
wins to pay them off. When the market tells you that you are wrong, get out of the trade and
take the loss.
9. Don't Think You are Smarter than the Market
The stock market is the combined opinion of millions of investors, many of them very smart and
very well capitalized. Do you think you are smarter than that? When you look at a stock chart
you are looking at the outcome of the many opinions cast by investors. Learn to read a stock
chart so you can understand what the market is telling you.
10. Never Stop Learning
I have been trading for 20 years and I am still constantly learning new things about how the
markets work. The basic principles and methods that I use have not changed a lot, but how I
apply the basics is constantly evolving. Keep your approach simple but always adapt to the
changing market.
3/6
NEVER do these 10 things + 3 Trading Stocks
Written by Tyler Bollhorn - StockScores.com
Monday, 17 May 2010 01:08
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4/6
NEVER do these 10 things + 3 Trading Stocks
Written by Tyler Bollhorn - StockScores.com
Monday, 17 May 2010 01:08
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5/6
NEVER do these 10 things + 3 Trading Stocks
Written by Tyler Bollhorn - StockScores.com
Monday, 17 May 2010 01:08
References
Get
the
Stockscore
onleading
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Click
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some
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including
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Bollhorn.
Tyler
credit
University
could
by
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day,
his
not
card,
while
brother,
shake
of
when
Calgary,
working
started
his
Mr.
he
addiction
Bollhorn
was
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to
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years
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old.
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market
dream
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and
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market
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traded
capital,
living
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Disclaimer
This
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The
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writers
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