Common Mistakes and how not to make them (February 10, 2021)
A few days ago I posted a question on Twitter asking for responses to, what is your most common mistake that you know you are making? I got so many responses that I thought I would just do a quick video to kind of cover that; because I don’t like to pose a question and leave everybody hanging. I think I got close to 100 and I can’t respond to every single one individually.
The thing is, I noticed, and this was not a surprise, in fact, I knew that I would get this, I got just a handful of different mistakes. It just seems like everybody makes the same one. I have recently recorded other videos or classes, whatever you want to call it, on how to spot what your mistakes are and how to overcome them. So I have already kind of done this but I thought I would do it specifically for my question. I am going to show you a few charts but right now I just ask you to listen to me and see which are the ones that describe you. They all shouldn’t, but I think you will probably find that one or two of them does. Here’s the thing, just some of the responses that I have are: Panic selling part of a newly held position, too many positions to track, forty positions in a small account. I will kind of address some of these as I go, okay?
Too many positions in a small account, like 40, that is way too many; probably 90 percent, at least 80 percent. What you are trying to do is be right. You are trying to be in on every single trade that you are seeing. And you are deluding yourself, there is no way you are ever going to make any headway. Even if there are no commissions; you are never going to make any headway when you have got 40 positions in a small account. Frankly, you are never going to make any headway if you have got 40 positions on any account. You do need to be concentrated so that one good stock will actually make a difference.
After a big winner I over trade. First of all, it’s a common thing, it’s like, oh my gosh, I have a big winner, I’m invincible, I want more. I have got to do more trades, this was fun. I just want to get that feeling again. What that entails is, you don’t have a plan. You don’t have a specific way, a specific methodology for finding stocks that work for you, based on what your trading strategy is. I don’t care if you are a day trader, or a swing trader, or a longer-term trader. By the way, I will dispense with this really quickly, day trading, I’m going to save you a lot of money, after the first hour you’re done. By 10:30 you’re done. People spend the first half an hour, 45-minutes, maybe even the first hour making all of their money, and then they spend the rest of the day giving it back. At 10:30 in the morning you are through; that’s all I have to say about day trading.
Other things are, you get out too early. You see the stock is working, and I am out, I have got to get out of that. One way that you can deal with that is this: Shopify ( NYSE: SHOP ), you see how this is really brutal, a lot of drawing in there. This is what I did back in January when I put this trade on. I had drawn these lines, and I do this a lot, I just call it envisioning; where I will look at a chart and say, okay, if the stock does what, then I will feel like it’s a good trade, like I’m on the right side of the trade.
On the other hand, if the stock does this, then I am on the bad side of the trade and I have got to get out of it. When I was first drawing these lines, which was back when I initially made the trade here, my sense was that if the stock continues to just kind of do this, this is what I was expecting it to do, I got it, I saw this box here but I see the longer-term trend, sideways consolidation. The box that was being formed here, looked like it was a potential breakout. And so I thought, as long as the stock, just kind of generally speaking, holds above this level here, 1150.00, then I am okay. And so I drew these lines, this is good stock territory. The bad stock is if the stock starts pulling back like this and ultimately breaks the 50, then I am going to know I’m wrong and so I would get out.
Well, the stock was playing good stock for a while. If you don’t have a plan, if you don’t have a structure like this, you are going to sell right here. You are going to see the volume. You are going to see the stock gap up and then reverse and then you are going to say, I’m out of here, I’m wrong. You have to have a plan. Where am I buying? Why am I buying it there? How many shares am I buying, based on your comfort in the market, your comfort in trading, and where you are going to put your stop? If I buy right here and I put my stop right there, how many dollars per share am I going to lose? Multiply that by the number of shares you buy and you know what your dollar risk is to your account.
You have to know this information before you trade. You have to know exactly how many dollars you are risking on that trade. If you don’t know that you are going to get shaken out early, I promise you that, if you don’t know. If you do know that, then you can plan accordingly. And one of the adjustments to your plan is, okay well, that’s too much for me to lose. So you either adjust your stop, which you don’t really want to do because your stop needs to be based on some kind of chart criteria. Or you say, I’m just not going to trade that big; I have got to drop my position size down. You never want to risk more than say, 1.5 percent of your account on any one stock. So if you have $100,000.00 you should not be risking, you should not be losing more than $1500.00 on any trade. That doesn’t mean your position should not be bigger than 1500.00, it means that if you are stopped out on a given trade you should not lose more than 1.5 percent of your account. Personally, I try to go for even less than that but some days it doesn’t work.
Those are the things that you must do. So far the stock is in the good stock territory and as time marches on you see the volume is kind of declining, right? So it all good; now it starts to pull down here, it undercut the 50-day moving average. Well, my initial stop was at 1047.00. My initial stop was right down here. Again, I bought it here and I based it on a few different things. I had a set, a percent that I was willing to risk. And so on this pullback here, we’re not close to getting stopped out. It would be nice if the stock wasn’t doing this, but we’re not close to getting stopped out, and here we are. So now we’ve got a profitable trade, it’s not a monster trade, it’s up 10 percent. The point is, I had a plan. I had a stop, I knew how many dollars I was risking. And so when the stock pulled back into this bad stock zone it was really still okay because there was enough time that had gone by to where I kind of knew, I had a good sense for what the stock was doing, and it never knocked me out. It never knocked me out of this.
In hindsight, was this the best trade? It actually wasn’t and here’s why, because I have a plan. I have a process and this didn’t quite fit it. It was a little bit too high above the 50-day moving average, not hugely but 8 or 9 percent. So it was a little bit high above the 50-day moving average and I wouldn’t exactly call it a squeeze. I was just kind of trading it in a different manner and I am paying for it. So yes, we are up 10 percent, great, but it’s been a little bit of a wild ride. My mistake on this trade was, I didn’t execute my plan perfectly. I didn’t execute my trading process perfectly. If you have a process, listen to me, you must execute it perfectly, perfectly. Practice doesn’t make perfect, practice makes mediocre and it takes up time. Perfect practice makes perfect. Look only at charts that look good. If they don’t look good just move on. To be honest with you, I don’t know what I was thinking here on this.
Again, we are up on this but I did not execute my process perfectly. If you execute something perfectly, you know sometimes you are going to lose money. That’s just why they call it trading rather than winning; if only. In our culture everybody is trying to make it a risk-free life, own nothing, and be happy. Everybody stay inside. Everybody gets a participation award. If you take any risk it’s okay because we will bail you out, all of that stuff. Trading is not like that, trading is not like that. Trading is risky and you are going to have to pay your dues sometimes, even on the perfect trades. But if you exercise your process, if you execute your process perfectly at least you are getting in at the right time, at the right stock. And then sometimes stuff happens.
Draftkings ( NASDAQ: DKNG ), we had our plan. This was more of a squeeze; we had a nice move to the upside here. We just recently put this back in our Active Trade List, where, by the way, I am giving you stocks, entries, stops, and how to trade around it. We just took some off the table on our ZoomInfo ( NASDAQ: ZI ) trade. We are up, I think, a little over 10 percent in just a few days, which is fine. Personally, I think the stock is going higher. But when we are up 10 percent in just a couple of days, I will take a little bit off the table but I will hold the position. Why am I doing that? Because it’s part of my plan, it’s part of my plan. My plan has always been to take some off the table if this really runs up.
By the way, you see these little lines here? I drew these when we actually took the trade. My reference here was, this is what I expect the stock to do, run along here, then get a little retracement, and then I expect it to keep going. I don’t know that it’s going to do that but if it does that I’m good, so I sell into this. Now if the stock starts pulling back I’m okay with that because that’s what I’m expecting. If I am not okay with this kind of a pullback then I need to be selling more right now. If I am not going to be okay to hold the stock, perhaps even to test 50.00, that’s a 10 percent pullback, but if you are going to make real money you have to be able to trade through ebb and flow, you have to. As long as this does this, as long as it does what I think it’s going to do then I am okay with that.
However, when you are up so quickly, I am up this much today, you could trade around that. Here’s what you have got to be looking at on something like that. The last real sizable low was here, but there has been so much trading going on, I don’t really care so much about that. But this is what I do care about, on the day that we entered what happened was, this big long tail down. It had to do with the company finally closing on some notes they were selling. I think what happened is, the institutions that were buying those notes could then sell the shares that they owned. And then, boom, the stock went down and then ran back up. So I look at this as a key level here and from that I see the stock is up 20 percent.
Well, this is kind of a modified Bill O’Neil thing. O’Neil used to say that after a proper breakout if a stock runs up 20 percent, that’s the time when you at least want to be taking some off the table because that just kind of tends to be how far stocks go before they start their next base. That’s certainly a general rule. But in this case, when I see how much this has run it’s like you kind of have to take profits. You don’t sell it all, if you are selling it all then you are effectively a very, very short-term swing trader. And then so many times you sell it all and then a week later or a month later you look at the stock and it’s up 60 percent higher than when you sold it and you go, crap, I am a great stock picker but I really sucked on this one because I sold it all too soon. By the way, this is one of the biggest mistakes, most frequent answers here to my question, I sell too soon. Not having patience on trades. Early exits. Closing calls for a good gain, somebody is buying calls, but too soon. The price spikes and I missed out on a great trade. I got a good trade but not a great trade. Basically, that’s it on these.
Setting a specific price target, and by the way, when you set a specific price target what you are doing is, you are limiting yourself because the stock is not going to go someplace just because you think it’s going to. So it’s just really a guess, and so you set it and once the stock runs up to that level you’re out. You say, oh it hit my target. Well, who are you to be making a target? You can do kind of a guesstimate but that is, listen to me here, doing a guesstimate, I do measured moves all of the time but this is why because it helps me with my entries. It helps me with some kind of a profit expectation. So I see this stock retrace by 25 percent, it fell about $13.00 or so, from here down to there. And so then I see the breakout here. If I run it up 25 percent I get a move to about 62.00. If I run it up $13.00, what do I get? I get about 63.00. So what does that tell me? It doesn’t tell me anything, but it helps me frame my estimate, and so I am looking for at least $60.00.
Now, why would that be important now? It’s not, it’s important when I actually get into the trade to begin with; because I am looking at this and I am seeing, okay, this looks like it’s breaking out. I wonder how high I could expect it to go? Not when I would sell, but how high could I expect this to go? So that’s the type of move that I would measure. And I would say, okay, I think it would probably go to 60.00 anyway. Yes, I bet it would go to 60.00 anyway. So the stock is at 50.00, so I am looking at a potential for a 20 percent run from 50.00 to 60.00, so we wait. But still, I sold some of my position today because the stock has made this first move. Now if it pulls back and holds up I will be buying that back.
That is trading around a core position. People tend not to do that. It’s like, oh that’s great, I’m looking for 60.00 but it’s up to 55.00, so I am going to sell it all. No, you take some profits off the table, which lowers your cost basis in the remaining shares and gives you more cushion. And then ultimately what you want to do is, let’s say you have taken $5.00 of the table. Your stop had been $5.00 below where your entry was, you took half off the table so you booked a $5.00 profit. At that point you can say, hey, I know what I am going to do. I am going to go ahead and raise my stop on the remaining shares that I have so that I am risking a max of just $1.00. Or even if the stock pulls back I sell right at where I bought. What you are doing is, you are locking in a gain. You are locking in a profit on that trade. Or if the stock does pull back you go ahead and buy some more stock and then you place a stop on that new position. The idea that you want, and I don’t care what your issues are here, what you want is progressive exposure. You want progress exposure without taking on progressive risk.
By the way, This is textbook Mark Minervini stuff. Mark talks about that, about backstopping your trade. About making sure you know exactly how much you are risking. But here’s the other thing, and now I am getting back to this idea about early exits. I sell too soon. I am always trading out early because I see another stock that looks better and so I am never really making any money. These are answers that I got. With respect to that kind of stuff, if you have your plan you must fly your plans; the basic axiom of aviation, plan your flight, fly your plan. If you don’t have a plan you will never trade well. You are always going to be sporadic. And here’s the thing, it will be amazing when the market is really strong, you are a genius. When the market rolls over or starts getting choppy, you’re a dunce. So you must have a plan that identifies what your setup is. How close is the stock to the 50-day moving average or to prior support. Is the stock in a squeeze? What’s my trigger for breakout buys? Where would I put my stop? What’s my average position size, etcetera, etcetera? You have to have all of those things as part of your plan and then you have to stick to that plan.
This is the most common mistake boiled down, you either don’t have a trading plan or you have a trading plan but you don’t stick to it. Now, am I describing you on that one? If you are a member of Stock Market Mentor, you absolutely have a trading plan because I harp on this every stinking day. You have a trading plan and I show you what mine is, I lay it out on all of my trades. We are trying or repeatable things here so you have a plan. But the question is, do you stick with it, or are you an, oh, this time is different, trader? You have to get past that and that’s a really, really difficult thing for people to do. I am just telling you this, if you ever want to make big money you must stick with a sound trading plan.
Having a plan is not enough, it’s like the old saying, deed not creed. In other words, I don’t care what you say, I care what you do. I don’t care what you plan, I care how you execute that plan; so that’s the biggest thing. Also, you have to write it down. You have to write down that plan on any given stock. Before you get into the trade you write down, wherever you are going to write it, you write down I will not sell this stock unless… write down a price. And as you are looking at the trade you say, okay, if the stock hits that price and I sell it according to my plan, I’m taking a loss or whatever, is that loss okay for me? And if it is okay for you then what you need to be doing, you need to be looking for the loss.
You need to be biased in favor of being wrong. You need to say, I have my plan and my plan is that if I lose “x” amount of dollars that’s all I’m going to lose. And so you need to have an expectancy that you may actually lose that amount of money and it has to be okay with you. It’s not going to make you happy but it has to be okay with you. If it’s not going to be okay with you then either don’t take the trade or just trade smaller but it has to be okay. As long as it’s okay initially and you have written it down, then go ahead and set a stop and then ignore the position. Set alerts on the upside too so you know. I had a couple of alerts firing off today. I had one of them fire off when the stock ran above 55.60, that was yesterday’s intraday high, I just wanted to know. You are doing these types of things, they are all enabling you to stick to your plan. And if you are doing that, yes, you are going to take some losses, that’s just trading. But if you have a sound strategy you are ultimately going to be in the right stocks at the right times.
The other thing is, anticipating breakouts. People get this magical thinking and they think that they see something, oh, this is going to break out. You look at this here, it sure looked like it was going to break out here but it didn’t. It ran up to 50.00 then reversed. Oh, this is definitely a breakout, I am definitely buying this stock here. It’s almost ready to break out, the high was even above 50.00, I’m buying it. Well, that didn’t work out too well for you because at some point the following day it fell clear back. So this is anticipating a breakout, sometimes you can do it but typically not. And then you are still sitting here a couple of days later. And so what are you doing by this day? You are going, crap, I anticipated the breakout, exactly what Fitzpatrick told me not to do. I am going to go ahead and sell this thing, oh, I am such a dunce. Now the stock does break out, it holds above 50.00, you’re in or you would have been in and now it’s up here. This is all a big mistake of just not having a plan. Another thing is emotions. If you are an emotional trader you are trading too big, you are trading too big. If you are getting emotional the one way you fix that is to trade smaller. Lower your position size and you are going to do fine; that’s just an emotional thing.
The other thing is, I look at stocks in 2-time frames. Ultimately I look at them in more than 2 but this is how it works; I am looking at a weekly chart. This is how I first looked at ZoomInfo ( NASDAQ: ZI ), this is a new trade for me. I am seeing the stock, how it’s looking here on the weekly chart, fine. And then I see how it breaks out sometime this week. Okay, great, I’m in this stock. It was this chart here that led me to my decision to buy the stock. Weekly chart, my decision, I want to own this stock. So what do I do? I move to the daily chart to actually take action. I have made my decision, I want to buy this stock. If it breaks out above 50.00, that’s definitely what I want to do. I have decided but I am not doing it because I am waiting. And then finally, I am buying the stock here. And then as soon as I am buying the stock there I am zooming back out to the weekly chart so I don’t do anything stupid. It’s decision action time frame and then as soon as you take action, boom, it’s back to decision.
Now you can say, wait a minute Dan, you just told me you sold some of your stock. Yes, and that is part of the plan, that’s part of my plan. If it runs up quickly I will take some off the table to give me more staying power, to give me more holding power. Now I am a stronger trader because I already got some profits. I have already got some profits built into the trade and I feel better about it. It all starts with the decision action time frame.
It really all just boils down to the same thing, what’s your process for entering? Don’t anticipate it. What do you need to see for a setup? And then once you have your stock list of setups, what do you need to see to actually take action on the stock? Think about it this way, if a stock is almost giving you that trigger what is your advantage by buying just a little bit before the trigger? Half of a percent? A percent? How many dollars do you stand to make by buying a little bit early rather than waiting for confirmation that the trade is going to work? Typically, the answer is, I don’t get that much of an advantage by anticipating a move that makes me feel like I want to go ahead and take that extra risk. Wait and trade what you see. You have got to just know what you are watching for.
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