2016 has gotten to a bad start for the stock market, amid what we are seeing are fears of default from the the oil and gas sectors that are sending stocks much lower,
whereas only the very defensive stocks are spared.
Hence I would like to share the common mistake most traders made and at the same time what can be done to restrict losses in a tough market
1. First the most common error made by traders, are failure to set STOP LOSS. Typical stop loss position are set at 3 to 5% of the market value of the position.
I seen traders that did not set stop loss and losses run to more than 10% of the trade. That can have a devastating loss on the capital position.
2. Next , failure to identify the trends and support and resistance level in the market. Therefore , market participants are purchasing stocks when the particular stock is sliding,
This means they will suffer losses as stocks are likely to slide until they reach the next support level.
And only when stock reaches support level, then the stock will rebound and normally person who enter beforehand will not purchase any more, hence the chance to profit from this rebound is lost.
To correct this problem, traders should have strong understanding of Identifying Chart Patterns and Support / Resistance, in short is known as Technical Analysis.
3. Trading in penny counters during down market is especially tricky because of low level of liquidity in a stress market, penny stocks can fall rapidly and if there is no stoploss , large losses can occur.
4. Volatiltiy is very risky , market swings up and down , so if you did not manage to purchase at resistant level, you can go on emotional swings which can cause rather irrational trading decision,
that is buy high and sell low.
Have a game plan ready and know where is the resistant and support level and avoid making hasty decision.
5 Next, are mostly fundamental problems. Market participants need to read daily news update to get a feel of how the general fundamental market conditions are.
They need to understand that if the oil prices are sliding, they should avoid trading oil related counters, and this is especially so, that for oil prices at $30, defaults in the oil and gas sectors may appear.
To solve this problem, there are daily market updates, that includes bloomberg news on Global and Asian markets and also daily US market updates.
Take time to read through them , its is in summarize form and especially if you are busy in the day.
6. Portfolio have to be review and adjusted, especially when blue chips are getting cheaper by the day/
As you are aware that portfolio review is available, and prices are low, you should take the opportunity to make adjustment to your portfolio
when blue chips price are low.
In this way you are able to strengthen your stream of dividend and get better quality stocks to your portfolio.