About UsAbout Us Contact UsContact Us DisclaimerDisclaimer FeedbackFeedback TestimonialsTestimonials



 

Common Day Trading Pitfalls


There are a number of things that can go wrong when you trade stocks  Here are some of the common pitfalls -
  • Execution of your orders are delayed due to order backlog or technical problems causing your trade to be executed at a higher price.
  • You enter the wrong stock symbol when placing your order.
  • Your online broker's web site goes down during the day and you cannot complete your trades.
  • Crossed or locked prices may occur for a period of time during which orders are not executed at all.
  • Failure or delays of real time data feeds can cause you to take an mistaken view of market conditions.
  • Your ISP goes down during the day leaving you without an Internet connection.
TOP


Stop Loss Orders and Trailing Stops

All stock purchases are, of course, made in the expectation that the stock price will go higher. Frequently, however, the market moves against a trader, creating an unexpected loss when the position is closed out. The use of "stop loss orders" and "trailing stops" are tools that greatly help traders to minimize losses (or lock in profits), if the market suddenly moves against a position that remains open. All day traders should use these tools.

Stop Loss Orders
A "stop loss order" is an order to sell a stock at a price below the current market price. For example, suppose that you have just bought 1000 shares of xyz at Rs. 50.00. You decide that you only want to risk Rs. 5.00 per share on this transaction. Accordingly, you immediately place a stop loss order at Rs. 45.00.
This means that if the price of XYZ should drop to Rs. 45.00, your broker will sell your 1000 shares at a market price of (or close to) Rs. 45.00. The use of a stop loss order will therefore pre-determine the maximum loss a trader will incur.
There are many views on where traders should set their stop loss price levels. A common and simple approach is to set your stop loss price between 10% to 20% below the price you paid for the stock. In the above example, the stop loss was placed Rs. 5.00 or 10% below the XYZ stock price of Rs. 50.00.

Trailing Stops
In addition to placing stop loss orders to limit your losses, you can also use the technique of "trailing stops" as a means of locking in your profits should the stock price increase. Referring to the example above, assume that the share price of XYZ increased to Rs. 60.00. You now have an unrealized gain of Rs. 10.00 per share. You believe that the share price will go even higher so you decide not to sell the shares at his time. However, at the same time, you wish to protect or lock in a portion of your unrealized profit on these shares in the event that the share price does in fact move back down. To do this, you would cancel the existing stop loss order of Rs. 45.00 and place a new stop loss order at, say, Rs. 55.00. If the share price declines to Rs. 55.00 your position will be sold out at a gain of Rs. 5.00 per share. If the stock continues to go up, you profit even more and may decide to place another stop loss order at a higher price to lock in further gains. You can continue to "trail stop" up as the price rises as many times as you wish.
Two final points about stop orders and trailing stops. First, the stop price should always be sufficiently below the current market stock price to compensate for the normal intra-day price volatility of the particular stock. Otherwise, you will find that your positions are frequently and unexpectedly closed out. Secondly, the use of trailing stops requires frequent monitoring of the stock price, as it is up to the trader to adjust the stop loss upward as the price of the stock increases
TOP


Trading Tips from a Great Speculator
Reminiscences of a Stock Operator by Edwin LeFevre is a timeless, classic investment book first published in 1923. The book is a slightly fictionalized account of the life of the legendary trader Jesse L. Livermore - a man highly regarded as one of the shrewdest stock traders and speculators of all time. Despite the fact that it was written quite some time ago, it continues to offer valuable insights into the art of trading and speculation.
The book tells the rather amusing story of a young trader's progression to day trading in the then so-called "bucket shops" and from there to market speculator, market maker and finally market manipulator. Over a period of about 40 years of trading, Jesse developed a keen talent in the art of speculating. Along the way, many lessons are learned by this trader which he shares with the reader.

Jesse Livermore's Stock Trading Tips & Comments

  • Remember that stocks are never too high for you to begin buying or too low to begin selling. But after the initial transaction, don't make a second unless the first shows you a profit.
  • If a stock doesn't act right don't touch it; because, being unable to tell precisely what is wrong, you cannot tell which way it is going. No diagnosis, no prognosis. No prognosis, no profit.
  • Always sell what shows you a loss and keep what shows you a profit.
  • The principles of successful stock speculation are based on the supposition that people will continue in the future to make the mistakes that they have past.
  • Don't argue with the tape. Do not seek to lure the profit back. Quit while the quitting is good--and cheap.
  • Never buy a stock because it has had a big decline from its previous high.
  • There is only one side to the stock market; and it is not the bull side or the bear side but the right side.
  • Never act on tips.
  • The speculator's chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you hope that every day will be the last day--and you lose more than you should had you not listened to hope--to the same pioneers, big and little. And when the market goes your way you become fearful that the next day will take away your profit, and you get out--too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. he must fear that his losses may develop into a much bigger loss, and hope that his profit may become a bigger profit. It is absolutely wrong to gamble in stocks the way the average man does.
  • A man must believe in himself and his judgment if he expects to make a living at this game.
TOP