There are several behaviors that almost all of us do subconsciously and that make us lose money when investing in stocks. In this article, we want to talk about some of them, so hopefully you can identify when you are doing them and prevent some bad practices to not lose money.
Forecast the trough
Buying a stock in the trough and seeing it going up to the top is an awesome experience. However, we never know when the new low is going to be the definitive low.
Something that cost $100 a year and now costs $50 seems cheap; but in a few more months, it could cost $25 or even $5. Every time you see a stock that had a high price in the past going down quickly, you will think it is cheap; but the truth is you are gambling against the trend.
Some people are able to forecast a trend reversal, but they never do it in the trough. They do it after the reversal has already started, and that means that you will not be able to run the full wave from the trough to the top.
Invest according to logic
The biggest problem with logic is that your logic is not usually the market’s logic. Investors who use logic usually base their decisions on their perception of the price. They buy when they think it is cheap, and then the previous section about the trough is applicable. They also buy when there is good news, and then what is explained here is applicable.
Moreover, investing with logic also usually means: “I have no idea about what investing is about, so I apply my own belief,” which prevents you from reading the books and manuals you need to, in order to know what you are doing.
Therefore, avoid your logic and educate yourself.
Force the reality to fit in the signals
Educating oneself is not the definitive step. Even when you know how to use indicators and analyse a company, your brain will try to trick you.
If you are browsing the market in search of something to invest in, you will be tempted to force the chart you are looking at to fit with a signal. For example, once you learn what a head and shoulders formation is, you will see it in every chart.
The truth is that they are not as common as we would like. Many times, market movements are unexpected, and even the best traders cannot forecast them. Be patient! Trade only when the indicator or the signal is very clear.
Anticipate the movement
One of the most basic techniques of trading is supports and resistances. It is said that a good resistance shall have at least three tops touching it and rebounding back to fall. The same happens with a support; but instead of tops, you will have lows. The more a resistance or support is tested, the more important it gets.
Therefore, once you see the price get closer to a solid support, you will feel anxious to buy. What if the price rebounds now, and I lose the next movement?
If you buy too soon, you will need to set the stop loss too far away; and once the price really touches the support, you will be very nervous and lose money.
To avoid that, accept that you will lose some movements if they do not get close enough to the support and trade only the times when the price really gets close or even touches the support, allowing you to use a tight stop loss.