When I post, please bear with me as my contents are targeted more at newbies, for obvious reasons. However, I hope the contents serve as good reminders even to experienced traders, who may find time to scan through my post and offer some advice as a follow-up. In this way, the advanced reader-traders could add more value to my post, which is written from a perspective of a novice trader.

I wish to write about the common distorted logic traders or investors tend to base their analysis on, when entering a trade , and this practice is very real.

Distorted Logic one encounters often is as follows:

1. What goes up must come down?

An instrument or stock that rises steeply in price and makes new highs are often viewed as expensive and overpriced. Yes and no. In a rising market, as long as the risk reward ratio is good, one often can find real winners here. Also what goes up is more likely to be a winner than those going down!

2. What goes down must come back?

When the price falls steeply, making new lows, this is often seen by novices as cheap and good real value. Again, yes and no. In a waterfall downtrend, the instrument may never recover, as the saying goes: Dead cats don’t bounce!

Then there is bottom-fishing, searching for undervalued stocks ,for example. This is best left to experts who has armed himself with lots of research and expertise.

3. Averaging down

The common misconception is if a stock is a good buy at the higher price, it must be a real bargain at the lower. So the novice will embrace a strategy to buy more as prices keep falling and lower than the initial higher price. The danger here is that if the market keeps falling, this stock or instrument will disappear from the radar screens!

Jesse Livermore in Edwin Lefevre’s book: Reminiscences of a Stock Operator has put it succinctly:

Let him buy one-fifth of his full line. If that does not show him a profit he must not increase his holdings because he has obviously begun wrong; he is wrong temporarily and there is no profit in being wrong at any time.

Lastly, a novice trader is susceptible to tips and rumours. The quality of market tips is usually poor, but traders often become attached emotionally. They keep holding on, losing their objective about prospects. They often talk their stock/instruments up, more out of wishful thinking or ‘into-wishing’ rather than’ intuition’ or conviction.

Hope this topic of distorted logic will be a helpful reminder to us all when we enter or exit a trade. It is tragic to have a distorted logic!

Being aware of fundamentals is just as vital, and newbies may find out why at IDkit: www.awanginvest.com or URL

http://awanginvest.com/?page_id=414

ANA aka IDKIT

Ag Moderator

Related Posts