Avoiding Unspeakable Share Trade Errors

Provided By Ultimate Trading Systems

How To Avoid The Most Common Share Trade Errors

Nobody thinks it could happen to them. Having your investments wiped out with a bad share trade. Losing profits that should have been yours. But these things happen all the time, and they can be easily avoided. But first, let’s look at some worst-case scenarios. Here are two examples of what can happen when you least expect it, and how things can be worse, much worse, than you could have predicted. Keep in mind the following examples are based upon actual NYSE market share trade events during March and April 2000:

• Celera Genomics (CRA). Their share trade value dropped 70% in only four weeks, helped by a statement by Bill Clinton and Tony Blair on March 14, 2000, favouring free access to human genome sequences and calling on genomics researchers to make their data freely available. Celera's business plan was to make money through patents on its genomics databases.

• Microstrategy Inc. (MSTR). Their share trade value dropped 60% in only one day after announcing that its quarterly results wouldn't meet analysts' estimates. “Changed accounting methods”, or accurate accounting, had forced it to restate revenues and operating results. The same day, it changed its 1999 full-year results from a profit of 15 cents per share to a loss of up to 51 cents per share.

Such volatility is common in today's share trade markets. This should be an obvious statement to make, everyone should know this. But many traders assume the volatility won’t affect their positions. This is the kind of thinking that leads people to make a share trade on margin and then lose their entire investment when the unexpected occurs, as it always will.

Sudden crashes aren't the only kind of stock market disaster. There's also the horror of a slow, grinding ride down over a period of weeks and months. Look at the chart for just about any technology or dot-com stock between spring 2000 and spring 2001 and you'll see losses of 50%, 75%, and even 90%. Some charts won't even be available because the companies have gone out of business. The only people who'll remember their share trade is the ones who lost their entire investment (or much of it) because they never knew when to get out. They didn't have a plan to exit at a certain point to limit their losses.

Losing the money you put into a share trade isn't the only kind of disaster. There's another one: making a great share trade, running up a nice paper profit, and then watching it slip away until you actually start to lose money on the share trade. Think this can never happen to you?

Here’s an example: A trader enters a $10,000 position and watches it double in price in only three days. He's made $10,000 off a share trade in three days, and he's ecstatic. The position then weakens and falls a little, but he doesn't want to sell it yet. He thinks, “What if it turns around and goes up another 50 percent? That would be worth another $5,000.” So he holds, hoping the position will recover and continue rising. He holds and it drops, and he thinks about how much he wants his “profit” back, and he holds and finally ends up losing money on what had been a very profitable share trade. This should never happen, but it does all the time.

These are unspeakable errors, losing your capital and losing your profits, and they are completely avoidable. All you need to do is set stops. Set stop-loss orders on every share trade, and move to trailing stops when a share trade becomes profitable. You protect your capital and lock in your profits. And then you can truly say, you will never make these mistakes.

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