With 2 Indices Clearing Major Resistance, Watch Out For This Common Trader Pitfall

Thursday, both the Russell 2000 and the Nasdaq 100 cleared major resistance levels from the 50-day moving average. In many traders/investors’ minds this has opened the bullish flood gates with new highs in view.

Additionally, the High Yield Bond ETF JNK is holding over its 50-DMA.

In the past we have watched JNK as an indicator for investors risk appetite in the market.

JNK moving up/holding supports the market as the Federal Reserve has been involved in buying bonds on a monthly basis and it shows that investors are willing to take on risky debt.

However, even with these key resistance levels cleared in IWM and QQQ, we should be careful not to run into a common trading pitfall.

Chasing!

Chasing securities is dangerous and can easily lead to losses if conditions turn against you.

And frankly, the market has been very choppy.

Therefore, asking yourself some quick questions before you place a trade could save you from some nasty price movements.

One question we always ask before making a trade is: “Where is our risk?”

This will force you to pause and look at a chart in order to find a decent price level to risk to.

When choosing a risk level here are two main points to keep in mind.

  1. Does my risk level have any meaning?
  2. Can I expect to make at least double my risk?

For instance, if we buy a stock for $10 and we risk $2 dollars, we expect the stock to move up $4 (double our risk) to at least $14.

Keeping these numbers in mind is important because if we know how much we expect to make then we can clearly see where the $14 price level is on the chart.

This could show us that the stock needs to break considerably, which may often mean a breakout to new highs.

Also, when choosing a meaningful risk level, try to find a point on the chart that makes sense from a support point of view.

Maybe you can find a recent low, a major moving average, or breakout level that offers support.

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