Top 4 Stock Trading Mistakes

The Top 4 Stock Trading Mistakes

There are thousands of ways to make money in the stock market...and there are even more ways to lose it. I'd like to share with you a few of the top stock trading mistakes and how you can avoid them.

Be honest, do you do any of the following? If so, you're not alone, I'll admit I've made all the mistakes listed, but the good news is you can change all that. When I changed it up, that's when I started making serious cash.

Stock Trading Mistake #1: Overtrading and/or trading too many products

At best guess, over 80% of short-term traders lose money. It's a guess because there are few traders who admit they lose...ego.  I'm only right about 43% of the time, but I cut my losses and let my winners run, (see stock trading mistake #3 below), which puts me in the 20% making money.

Reasons we overtrade #1: not staying in a trade long enough.

Pretty simple really, when you're in a trade, take a loss or get stopped out, now you can trade again.  It never fails, when I look back at my WORST months, they always have 30%+ more trades.

Don't take my word for it, listen to the words of one of the greatest traders of all time, Edgar Lawrence Smith:

"Buying a well-diversified group of common stocks, our chances of coming out even or making a profit are: Within 1 year, 78/100, two years, 87/100; 4 years, 94/100"

That was written in 1924.

The point here is that the more you trade, the greater the chance you'll lose.  I ran my 2017 numbers and that is exactly the case.  Pretty much every time I had over 40 trades (open plus close = 2 trades), I lost money. Every time I was under that I made money.

2017 trading results

There were a few anomalies in January and September: in those 2 months I avoided Mistake #3, I cut my losses and stopped trading. In fact, all of my losses in September happened in 3 days.  Check out my P/L on 9/25/17 and then I managed to lose 1.8% within 3 days. Sometimes, everything goes happens.

trade results september

A note: haters back off. No, I'm not just showing you my green positions, I'm showing you all my positions.  There are plenty of times when they are all red. I shed my ego long ago when it came to trading, and it's made me a better trader.

Any whoozle, there you have it, I'm proof overtrading will lose you money...and that's all the proof I need.

Reasons we overtrade #2: Too many products.

You really should never have more than 5-7 positions on at most. You'll see I have 7 futures (short-term trades) above and 3 longer term buy and hold stocks.  When you start trading 10+ securities, you definitely diversify your investments, but combine this fact with what we already know about short-term trading: the shorter term you trade, the more losses you'll take.

So, if you're holding 10+ positions and you're a short-term're setting yourself up for a disaster...the numbers are not on your side.

Solution #1: Focus on Trading One Market: The S&P 500

Stocks and futures are risky, and it can be hard to determine which stocks you should be in and which you shouldn’t. Right now there are over 8,000 stocks in the U.S. what are the odds you'll pick the best ones? Not great. However, it is quite easy to decide whether you should be in “the stock market” in general.

The S&P 500 is a basket of the 500 largest companies in the United States. When people say, “the market” this is what they are referring to. If you invest in the S&P 500 alone, you will beat 96% of all mutual funds!

Don’t overwhelm yourself with thousands of stocks, just trade the S&P 500 and you will make a MASSIVE amount of dough.

How to trade the S&P 500

The best way to invest or trade the S&P 500 is using the ETF (Exchange Traded Fund) “SPY.” There are two other ETF’s that move at twice the percentage moves of SPY. They are SSO (2x Long) and SDS (2x Short).

ETF’s are common these days and can be bought and sold in almost any account. They trade just like stocks and are regulated by the US Government. So, if you thought the stock market was going to go higher, you would buy SSO. If you thought the market was going lower, you would buy SDS.

Stock Trading Mistake #2: Trading against the grain

A lot of the time short term traders "think" they are neutral about a stock and they treat up and down the same, so they go long when it's moving up and short when it's moving down.

Bad idea. You never want to catch a falling knife. Check out this link to learn more about what that means.

Essentially it means don't short bull markets and don't buy bear markets.

Solution #2: Determine a bull or bear market

Naturally, to figure out if you think the market is going up or down, you need to determine if the stock market is in a bull market phase or a bear market phase.

One way to determine which way the stock market is going is to take the average close of the last 200 days of the S&P 500, called the 200-day moving average (200 MA). If today’s price is above that average, it’s a Bull market, if it’s below, it’s a Bear market.

Over the last few years, SPY has been above the 200-day average a majority of the time. Naturally, we would buy SPY or SSO because the market should continue higher.

The Perfect Year

In 2013, SPY was well above its 200-day average signaling a Bull market. The correct course of action was to buy SPY or SSO. Each time our system told us to buy it was a winning trade.

Here's what it looks like when you follow all four solutions listed in this article. We'll get to the others but you can quickly see there were only 13 trades and we were always going long in a bull market.

perfect trading year

Yes, you can short the the right time.

In 2008-2009, SPY was below its 200-day average signaling a Bear market. The correct course of action then was to short SPY or to buy SDS:trade

Bonus Solution: How to trade more than one product but still keep it simple.

Like I said above, we can trade more than one product, I keep about 7 going at all times. The key avoiding mistake #2.

Turns worked so well for us, we built a whole system around it. Our Daily Stock Trading Strategies have been on fire this year. Here's a small video if you're interested in how it works.

Stock Trading Mistake #3: Losing too much money per trade

We all have heard to "cut the losers and let the winners run," but it's a LOT harder than it sounds.

Why, because we can't predict the future: how many times have you also heard of being up in a trade only to watch it turn against you and then you HOPE it's going to got back up...then it doesn't and you take a whooping.

You were trying to do the right thing, you were trying to let the winner run and it turned into a loss. It's happened to me plenty. It still happens sometimes, but typically I have my stops set when I enter a trader, which brings me to the next solution.

Solution #3a: set your stop when you enter a trade

Great traders never focus on how much money they can make; they focus on how much money they can lose. Focusing on profits is a get rich quick mentality that will blow up your account.

When I'm setting up a trade the first thing I ask myself is how much am I willing to lose? I then set my stop and walk away. By placing the stop when I enter I've automatically cut my losses and let my winners run.

Understanding the reward/risk ratio

People often get this confused. If I risk $1 to make $1 then my break even is 50%.

Let's keep it simple: I make 2 trades. The first I make $1, the second I lose. I started with $1, went to $2, then lose $1. I broke even on 2 trades.

If I risk $2 to make $1 I need to be right 66% of the time because for every 1 trade I lose I need 2 trades that are winners. In 3 trades, I need to be correct 2 times or 2/3=66%

I mentioned at the beginning, I'm wrong a lot, 57% of the time I'm wrong because I'm typically trend following in my personal trading.

risk reward ratio

This means I risk less than my reward. I could risk about 1/2 of my reward, meaning if I risk $1, I can make $2, but I typically shoot for better than that by risking $1 to makes $3.  As a result, I only have to be right 25% of the time and since I'm right 43% of the time, I know I'll come out on top.

Solution #3b: Risk Management

Not many people will tell you that the key to making a fortune in the stock market is risk management.

Not only is it a good idea to understand the risk/reward ratio, you need to know precisely how much of your hard-earned capital to put at risk depending on how volatile the market is.

If you are going to buy shares of the ETF “SPY” there are two things you need to need to know. How big your portfolio is and the volatility of SPY’s price (this can be found by taking the average range of SPY for
the last 30 days) aka. The Average True Range or ATR.

Volatility is just that: how much a security moves. Some securities move up and down more than others, like Tesla or Gold Futures, others are more stable and dependable, like SPY.

To find the ATR, just google “SPY Average True Range.”

Number of shares to buy = ( your portfolio size ) / ( SPY’s price * SPY’s volatility * 2.6 )

Currently, SPY is priced at $236.49 a share, and its volatility is 0.7227. If you have a $10,000 portfolio
you would buy:

how to trade spy

($10,000) / ($236.49 * 0.7227 * 2.6) = 22 shares

Now you are confident that you are risking the EXACT right amount of money based on current market

Forget this formula and your portfolio will go up in flames!

To safely build your portfolio you don’t need to read the news every day, worry about the economy or
politics. You just need simple math and the right set of rules to follow.

Here is our trading strategy using the SPY ETF. We've hard coded the money management formula above into it so that it risks the exact right amount every trade. You can see how the numbers un the "Buy" point fluctuate based upon the ATR.

risk management applied

Stock Trading Mistake #4: making "exceptions" to your rules

Successful traders live and die by their rules because the rules give us exact percentages of profits, wins and losses.  If we stop following those rules, the numbers are no longer consistent.

The key to making money in the stock market is consistency.

When you consistently follow the correct rules such as buy/sell in a bull market and short/cover in a bear market, you will profit handsomely! Over time you will see your account flourish.

Solution #4: Stick to your rules

As long as you stick to your rules, you’ll always know exactly what to do and when to do it, in the process, you will become very profitable.

Bull market, bear market, we don’t care. We consistently make money every year. Our S&P 500 Swing System is a series of many different rules, starting with the avoiding the mistakes above.

The results look like this:

Our rules are so profitable that they net us on average 20% returns per year. Do you know any bank or mutual fund that will return 20% per year?

Using our rules, had you started with a $5,000 account in 1997, you would now have over $350k in the bank. Had you bought and held SPY shares with the same $5,000 in 1997, they would be only worth around $15,000 today.

Would you rather have $15,000 or $350,000?

What if you could achieve this return with as little as 2 hours of your time PER YEAR?

This trading system avoids all 4 mistakes

  1. 15 trades per year. We're not over trading.
  2. Following bull and bear markets. We never go against the grain.
  3. Risk Management is built right into our trades.
  4. We NEVER deviate from the rules.

Our trading system is designed for the average investor and makes about 15 trades per year. Placing a normal buy or sell order with your broker only take about five minutes.

5 * 15 = 75 minutes per year

How would you like to use our S&P 500 Swing System instead of figuring all this out on your own? A plan to profit in the good times and when the market starts to tumble?

-> Click here to learn more about all my different systems that beat the stock market <-

Best Swing Trading Strategy


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About the Author

My passion is education: it is through education that we can change ourselves and build a better world right now and in the future.

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