The Biggest Mistake Traders Make in This Kind of Market

Stocks continue to act poorly. Growth stocks are struggling again and speculative interest in small-caps has dried up again.

A good illustration of the poor speculative action is cryptocurrencies, as bitcoin hits multi-month lows. There is some strength in precious metals and pharmaceuticals, but those are safe-haven sectors when the market is weak.

In this sort of market environment, the focus should primarily be on two things: patience while waiting for better price action and short time frames if you are interested in playing some volatility.

The biggest mistake that I see traders make in this sort of environment is that they often let short-term trades turn into longer-term investments when that was not the original plan. It is very easy to stick with a trade that is not working rather than admit it was a mistake and take a quick loss.

Quite often, this error is compounded by averaging down further and then growing impatient and emotional when the stock does not bounce as anticipated. The biggest loss my most traders take is when they average down a position too quickly and too big and then finally give up when it never seems to reverse.

There is nothing wrong with bottom fishing a stock that appears to be a good value, but if the price action doesn't improve, then you have to take the loss and wait for better action to develop. I will often take numerous small losses on a potential trade before it finally starts to work in the manner I would like.

In the current market environment, individual stock-picking is not working well. That can change quickly like it did this past Friday, but you can't be forgiving of poor price action if you want to keep your accounts at highs.

I have recently noticed a number of traders who were very aggressive in growth stocks, racking up huge losses. These traders were great at staying with momentum in a strong market, but they never set a hard stop level. That works great in the right environment, but when the character of the market shifts and pounds certain groups, then it is extremely painful if you are hoping for fundamentals to provide support.

This is a poor market right now, and it has been even more dangerous due to failed bounces. Stay patient and keep those time periods short until conditions change.

At the time of publication, Rev Shark had no positions in any securities mentioned.