Mistakes Traders Make

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What defines our trading psychology is not the presence or lack of mistakes, but what we do with those mistakes. In the coming series of posts, we'll take a look at common mistakes traders make and how they can use those mistakes to improve their trading.

An unfortunate number of traders have missed the bulk of the large upside move in stocks since the lows late in March. Out of a sense of prudence, they didn't want to "chase" the rebound and thus waited for a pullback. That anticipated pullback simply hasn't occurred.

As the late Ayn Rand taught, when things don't make sense, it's worthwhile to check our premises. What's the premise that traders are relying upon that is leading them to miss opportunity?

Quite simply, traders are assuming that pullbacks are measured in price action alone. If we don't see a correction in price, traders assume we haven't seen a correction.

But suppose we measure correction in other ways. For example, off the late March lows, we subsequently saw breadth--as measured by the percentage of stocks trading above their three-day moving averages--pull back to 47.47 on April 7, back to 32.39 on April 10, and then back to 49.39 on April 15.

All of these pullbacks occurred at higher price levels, because a few groups of stocks kept the averages higher even as the bulk of stocks retreated from their recent highs. From a breadth perspective, the powerful rally offered many opportunities to get into it.

Price alone does not define the market. What we look at determines how we trade.