Dumb Things Stock Traders Do

We all make mistakes. Stock trading is a never-ending learning experience. Just when you begin to think you know something, the market turns around and hits you in the head with a sudden loss, cutting you down to size and humbling you. But some things traders do are downright dumb, yet some traders keep doing them over and over again, without ever learning.

"Deer in the Headlights"

Every once in a while the market does something sudden, drastic or unexpected, paralyzing a trader's ability to react. For example, after he has done extensive research, a trader buys a stock that has the potential to double. Instead, the stock unexpectedly drops 20% in a day. It may be a secondary offering announcement or a sudden CFO resignation - whatever the cause, the stock acted contrary to the trader's expectations. Instead of responding quickly by selling the stock, the trader freezes, refusing to believe the sudden drop.

Rationalizing

The more effort a trader puts into finding a good stock, or the longer he owns it, the more attached to it he becomes. If the stock moves against him (not the kind of sudden and drastic move described above but a slow grinding slide), the more the trader rationalizes that his choice was right and that the pullback is just temporary. Some traders find solace in reading cheer-leading messages on stock message boards; others go even further and start posting such messages themselves, hating the stock's shorts and bears in the process.

Acting in Anticipation

A trader finds a great stock that is about to break out: exciting story, top-notch fundamentals, strong chart. All the stock needs is a little push - a breakout that will launch it into a new advance. The trader watches the stock patiently for the right moment to buy. The longer he watches it, the more he becomes convinced of the exceptional profit opportunity he has uncovered. Why wait? The earlier he buys, the more profit he will lock in by beating the crowd to it because a stock in a breakout can zoom through the pivot on just a few small trades, rising 10-15% in a matter of minutes. So the trader buys in anticipation of the breakout. But the breakout never comes. Instead, the stock starts losing volume and begins to sag, leaving the trader with a loss.

Acting Out of Boredom

Some traders believe that they should be active in the market at all times. But every now and then the market becomes dull: volume dries up; stocks are not dropping - not yet at least - but they stop advancing. Old timers have a saying: don't sell a dull market; but many novices become impatient and either sell what they have or start buying all sort of junk that they think should be going up, which only jerks them around.

More from this contributor:

Stock Traders' Worst Enemies

Professional Traits that Can Hurt You in Stock Trading

Stock Trading: The Danger of Acting in Anticipation