The myths and mistakes of amatuer traders

Even if you only trade occasionally, you've probably consulted some form of internet community for advice, be it a trading forum or chat room. If you haven't, well, you're doing it now. There is a plethora of great information out there, unfortunately it too often seems that for every good tip, there are 5 poor ones that are more likely to steer you into the habits of an unsuccessful trader. In this post I hope to list and debunk some common myths that I often encounter online.

• "I want to play BLAH but I don't know how... should I buy or should I short?"
• "I know it's a bad short, so it must be a good buy."
• "I know it's a bad buy, so it must be a good short"

If you don't have a good idea of which way a stock is going to move, don't play it at all. Just because something is a bad buy or short, does NOT mean that it is a good idea to play the stock in the opposite direction. A stock may be a poor short because there is strong technical support close to where the stock is currently trading. There may also be strong technical resistance above where the stock is currently trading, meaning that it would be a bad trade regardless of whether you went long or short.

• "BLAH is going to teh moon!!!"
• "Long BLAH"
• "All in... BLAH"

It is also imperative that you consider all aspects of the trade. Do not fall victim to the false security of seeing several other traders make the trade you are thinking about. Since 90% of traders lose money, the odds say that those traders just made a bad call and you would be wise to think before blindly following. Read all recent news, and check if there are any planned announcements on the horizon. There are also much less obvious factors such as the release of share lock-ups that could take you by surprise and cause you to lose money. The more research you do, the better you will be prepared to make a good trade.

• "BLAH is still being pumped/promoted... it will go back up/it isn't dead yet"

Stock promotions can take many forms ranging from internet forum hype, paid internet ads, spam emails, to mentions of the company on TV. Many people mistake these promotions as a risk free cue to buy. While it is true that many stocks rise initially, even that isn't a certainty. Furthermore, a promotion can go on for weeks as the stock continues to drop. The purpose of a promotion is to allow shareholders to sell so anything being promoted will be inherently burdened by selling pressure. Many times this selling pressure outweighs buying interest, causing price to fall and you to lose money if you buy into the promotion hype.

• "BLAH heading north, guarantee that it will hit 5.50 by next week."

There are times when all factors may point to the stock behaving in a certain way. However, even in these cases it is important to shift your thinking into terms of risk and reward. If all your research seems to indicate the stock moving in a particular direction, you may have low risk, but there is always some risk. There are NEVER guarantees in the trading world and you should certainly never take the word of an anonymous internet user of any such "guarantee."

• "Any trade that makes you money is a good trade!"

False. Good luck can make you money on a bad trade. If you fail to recognize a bad trade (even if you made money on it), you are liable to continue making such trades which will ultimately come back to bite you in the ass.

• "I'm in BLAH now but I don't know when to get out."

You should plan your exit before you ever enter a trade. If you find yourself in a trade and don't know what to do, it is best to get out.