The reason of sound mind investing mistakes
Very successful company needs a business plan. Yet, when most people take a gamble on the securities industry, they fail to put a trading plan into place. In other words, they end up going on an emotional roller coaster, governed by how the market performs.
Without a trading plan, the majority of traders approach the financial market in an inconsistent manner – i.e. they follow their whims. The typical pattern may include the following:
Day 1 – experiment with option trading
Day 2 – randomly select any online trading brokerage firm.
Day 3 – try out future trading
Day 4 – read about oriental trading then decides to go into that direction
Day 5 – change mind completely and try currency trading or forex trading
Day 6 – try day trading then in midstream chooses to hold trade for the long term
Day 7 – venture off into stock trading
Day 8 – dabble in commodity trading
Day 9 – give up because you think it is a hopeless cause.
This example is meant to look confusing. Similarly in the illustration above, this trader may use one set of indicators one day, and the next day they will throw these indicators out the window and take on a completely set of new rules.
Unfortunately, with no consistent approach, your trading decisions, governed by emotions, are doomed to failure ……… here is why.
When faced with losing money in the market, what do traders do? Usually, they end up rationalizing to hold on to a losing stock. The driving force behind this is that they do not want to be wrong. They let their ego get in the way of making profits.
LOOK! Let us set the record straight. THIS IS A FIRM FACT – not every trade will be a winner. You will not make the maximum profit out of every trade. There is no Holy Grail trading system! You just need a trading plan, which matches your personality.
When I purchase a stock, I note the current P/E ratio and chart it along with the price. Historically, P/E’s that move up 100%-200% or more while the stock is advancing, usually become vulnerable stocks and can start to become extended and flash sell signals. It holds true for a stock with a P/E starting at 15 and going to 40 or a stock with a P/E of 50 and going to 115. Don’t skip over EXCELLENT companies that are growing at amazing clips because of a high P/E ratio. What may seem high now, may be low later on! Earnings and Sales are much more important. Price and volume are the most important. The P/E ratio is just a secondary indicator that can be used to further analyze the stocks in your portfolio.
Always use price and volume as your first line of offense and defense. From this point, turn to some dependable secondary indicators to confirm your original analysis and then make a decision. I would never throw out a stock because its P/E ratio is too high. Take GOOG for example, every value investor missed the 100% gain that this stock boasted after the release of its IPO. Growth stocks are expensive for a reason, don’t forget the analogy to a Mercedes.
William is an investment advisor and has been writing about objective, methodical approaches to investing for over 10 years. He has helped hundreds of people make better investment decisions. To find out more about his approach and his FREE Newsletter, please visit: www.baydailynews.com;