Username
Password
Forget Password?
  1. Indices
  2. Commodities
  3. Currencies
Straits Times 3,377.96 +16.91 +0.50%
Hang Seng 28,765.40 +303.74 +1.07%
Dow Jones 27,154.20 -68.77 -0.25%
Shanghai Composite 2,924.20 +23.02 +0.79%
3 ‘T’s To Avoid Pitfalls In Trading
Education | 19 August 2014
By: Shane Goh
Articles (99) Profile
By: Peter Ng
Articles (81) Profile

In the world of stocks, there are two types of players: traders and investors. Traders tend to take a shorter-term view on the equities while investors prefer to understand the business and adopt a longer-term standpoint.

Each faces their own set of challenges. While some are specific to each type, a common denominator, and a big part of winning, is knowing how not to lose.

Although you can’t win in every trade, one can aim to lessen the frequency of losses. We like to explore three pitfalls that most traders encounter in his pursuit of riches: Trading against the trend, Tenacity and Testing

Trading Against The Trend

Most veteran traders would agree that “The trend is your friend” is perhaps one of the most crucial elements to follow for a successful trade.

Despite its cruciality, trading against the trend remains a common mistake made by traders whether it is intentional or unintentional.

More often than not, one of the indentations lies in the inappropriate use of indicators.

Let’s illustrate this with an example.

Trader A discovered that the price of Security A has hit its support and represented a viable point of entry.

Following which, he initiated a buy position on Security A (blue arrow) with a trading time frame of six months.

Price went up initially but began to fall and went below the 20-day simple moving average (SMA). Observing the sell signal, he closed his position (red arrow).

Subsequently, the security’s price rebounded and began to increase.

Source: ChartNexus

Despite the price of Security A has retraced below its 20-day SMA, Trader A should have used a SMA range that is more representative of his trade horizon i.e. 200-day SMA, noting on his trade time horizon of six months.

As the price of Security A had not broken the 200-day SMA, its price action remains in an uptrend which was evident as its price began to recover and eventually continued towards its trend.

By closing his position, Trader A has unknowingly traded against the trend.

Tenacity

After you have understood the fallacy of trading against the trend, the next area to address is the mind.

Having the determination to see through a trade criteria, such as closing an open position only at the end of the week, is tough when you see yourself up 30 percent on Wednesday, but your target is to be 50 percent in the black.

In our example, the trader entered the stock at point 1, with a long position, as it was above the lower trend line and its 14-day SMA had crossed above its 50-day SMA.

Although all was smooth sailing at the start, at point 2, the stock suffered a sharp spike down. The trader panicked and offloaded his shares, for fear of a larger fall.

However, upon closer observation, we noticed that the faster SMA had not crossed back down below the slower SMA, nor was the stock below its lower trend line.

This mean the trader should have stuck to his rules, and not fret over short-term volatility. Had he done so, he would have been rewarded as we see the stock continue its ascend after point 2.

Source: ChartNexus

Test, Test And More Testing

Regardless of how sound or perfect a trading strategy could be, it is merely a hypothesis without being tested.

While the process could be daunting and for some, steal the thrill away from trading, it should be emphasised time and again that the testing phase is an absolutely vital phase for one who aspires to trade successfully.

Professional traders spend as much as hundreds of hours to perform exhaustive back tests on their strategies.

Although this is not a suggestion to follow, however, what appears to be the same is the importance of the testing process even in the eyes of professionals. This would apply the same for any other traders.

Never Ending Journey

As with education, trading is not a skill that remains stagnant. The market is constantly evolving, and so should the player in order to be ahead of the pack.

One must continuously look for areas of improvement, be it in the technical or psychological aspect.

These three pointers are the tip of iceberg in a trader’s overall strategy when it comes to tackling the market.

This is a co-written article of Shares Investment, which lays out the analytical ideas and thoughts of the authors, who are well versed in investments and market concepts.


Join The Conversation
The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

All Rights Reserved. Pioneers & Leaders (Publishers) Pte Ltd. Best viewed with Mozilla Firefox 3.5 and above.