FOREX Mistakes in Profiting
Profiting from FOREX MISTAKE 1: TRADE AGAINST THE TREND
This is the number 1 mistake that FOREX investors make today. They trade against the trend of their positions. Remember, "The trend is your friend."
Enron is a good example, and what has become known as the Enron debate is a perfect example of investors trading against the trend. How about one of the biggest companies on Wall Street'? Do you think that such a company would be a good investment for your portfolio? HECK YEAH!
Looking at stock trends, you will notice how the stock price was going down. The long-term trend on this is down--- straight down. However, we want to point out a few things. First, there were a lot of Enron employees who loved the company. Most of the employees even took parts of their salaries as stocks and options.
Did you know that during the entire plung of this stock, there was not one sell recommendation from a Wall Street analyst? If you remember the stock went down from the $90 range, it had several retracements; that is, as the stock price was going down, it rallied and went back up a bit before going down again. As it was going down, what do you think investors were doing? They were buying. Why not--it was one of the biggest companies on Wall Street.
FOREX Mistakes in Profiting
Profiting from FOREX MISTAKE 2: LISTING TO SO-CALLED EXPERTS
If you remember the Enron stock had buy or hold recommendations from Wall Street analysts, never a sell. This is one reason why legislation was being discussed on Capitol Hill to solve this type of problem. The problem certainly was not limited to Enron. There was so much conflict of interest among analysts that most investors had a hard time keeping up with what was going on.
How many investors watch CNBC? Many, right? Well, where do you think the novice investors are getting their trading information? They get it from TV, newspapers, friends, and so on. The problem with this is that most of the information they are trading on is old, sometimes weeks old. You see this kind of thing happen all the time.
Let's say that 123 Company just announced that it has the greatest new computer in the world and that it will revolutionize the industry. What do you think is going to happen to the stock? It will go up, sometimes very quickly. However, usually the stock will turn around and go back down just as quickly when the volume dies down.
You see, in the world of stocks, there are market makers. These individuals have one objective in mind, and this is to make a fair and orderly market for a specific security. In the stock market, the reason a stock goes up is because there are more buyers than sellers, and the reason a stock goes down is because there are more sellers than buyers.
FOREX Mistakes in Profiting
While the stock market is hard enough to trade with all the variables to keep in mind, the problem with the so-called experts is conflict of interest. The companies these experts work for are also market makers and own stocks. The opinions of these experts cannot be considered without considering their other motives.
Investor confidence is at an all-time low and has dropped dramatically as major investment firms are getting fined millions of dollars after recommending stocks to the public and yet at the same time sending internal memos and e-mails describing the lack of profit potential these same stocks actually had.
The New York Stock Exchange (NYSE), as a self-regulating body, has taken on the task of changing the way it operates and has also taken the lead in cleaning up these problems. All the proposed and forthcoming changes will make a difference and ultimately allow for a better trading environment.
Next, there is a common falsehood among traders that for every buyer, there is a seller. This is not true. That is what the market makers are for. If there is not enough buying in a stock, then the market maker will come in and lower the price until there is more interest. The same holds true for selling. If there is not enough selling, then the market maker will start raising the price until it is more selling interest. This cycle repeats many times and is the basis of what is known as support and resistance.
FOREX Mistakes in Profiting
Profiting from FOREX MISTAKE 3: UNWILLINGNESS TO SELL
You have to be willing to cut your losses. There is no reason to ride a loser all the way down. You have to let your winners outpace your losers. You will learn a lot more about this when we get into good money management. We have heard investors tell me that they can't sell right now because they don't want to take a loss.You would have been better off having a stop loss on your trade and having gotten out with a 25 % loss to trade another day. We will cover stop losses as a way to use money management in your trading later. |
