How to Trade the Stock Market's "Dead Zone"

2016 is over.

I know we still have a little more than a week’s worth of trading days left. But market action is set to grind to a halt between Christmas and New Year’s as traders abandon their turrets for a little holiday cheer.

Not much happens during the last trading week of the year. In fact, stocks are already beginning to wander through the dead zone. The financial media is foaming at the mouth over Dow 20,000. But the Big Board won’t cooperate. It wandered toward a small gain yesterday afternoon, still more than 100 points shy of cracking 20K.

We don’t expect any big new to pop up and derail the markets over the next couple of weeks. But that doesn’t mean you should sit around twiddling your thumbs.

While the market continues to tread water this morning, it’s time to review our short list of 12 bad trading habits. Even seasoned traders can fall into these traps. And it’s worth mentioning that I’ve been guilty of quite a few of these mistakes before.

Here are 12 common mistakes many traders of every skill level tend to make:

1. Persistence in the face of repeated failure.

Insanity: doing the same thing over and over and expecting different results.

No, I’m not talking about the good kind of persistence over adversity. That would involve introspection, research, learning— you get the idea. In this case, I’m thinking of a trader who books consistent losses, yet doesn’t make any adjustments to try to correct the matter. He never considers that his approach is the problem, just that he’s had back luck or something. Speaking of which…

2. Failure to analyze losing trades.

So you’re booking loser after loser, yet you’re sweeping the results under the rug without any adjustment whatsoever? What’s the definition of insanity again?

3. Missing good trades from your watch list because you aren’t paying attention.

This is an easy one. Set an alert! If you want to trade a stock when it breaks above $30 and it’s sitting near $26, set an alert for $29.50. You’ll never miss a breakout again. Don’t be an idiot and leave a trade for dead just because you wrote down the ticker and didn’t set an alert. There’s nothing worse than finding a Post-It Note on your desk with a ticker scribbled on it—and then finding out it’s doubled over the past month…

4. Taking trades that don’t fit your system’s criteria.

You’re not making fruit salad—you’re trading. Why trade bananas and grapes if oranges are your thing? Stick with what you know.

5. Not having a concrete trading plan.

So you bought a stock you like. Now what? When do you sell? What are your targets? What about stop losses? What, you didn’t consider the fact that this trade might not work out? Whoops. Probably should have figured that one out beforehand…

6. Buying someone else’s trade on a whim

Your ideas might overlap with your next-door neighbor. But don’t get in a situation where you’re reliant on him to tell you whether you should be in or out. If you’re taking your poker buddy’s trade, you better be prepared to own it…

7. Revenge trading

This is when you chase after a not-so-perfect trade because you’ve lost money on the stock before and it “owes you one”. The market doesn’t care. Sorry. This scenario is kind of like dating your ex-girlfriend’s best friend. Sure, it might be fun at first. But there’s no way in hell it ends without your car getting keyed…

8. Playing favorites

The stock was good to you, so you come back for more even though you probably shouldn’t. This is much more prevalent and more difficult to correct than No. 7, in my opinion. It’s hard to get rid of the good feelings of a trade that was “just right”.

9. Ignoring stops

Your technique doesn’t matter. If you ignore your stops, you’re just shooting yourself in the foot. This is when trades become investments—usually bad ones.

10. Over-trading

You’re constantly maxed-out and trying to do too much every single day. Your broker loves you, but you’re account is treading water. You’re not a daytrader—but you’re changing your mind and taking several round trips every day. You need to hit the penalty box for a while to get your act together, but you’d rather try and grind it out. That’s usually a mistake.

Then there’s the exact opposite problem…

11. Under-trading

A short string of losses has paralyzed your trading. You end up riding the pine and ignoring quality set-ups instead of figuring out what went wrong and getting your act together. This “break” allows you to get away from losing money without having the do the work required to make any improvements.

12. Refusal to pick a time frame

Here’s another version of the fruit salad problem. Some of your trades are short-term. A couple should play out in a few months. Oh, and you’re snagging a day-trade here and there. Of course, there’s nothing wrong with having a couple of different portfolios. But a scatter-shot approach can be trouble. This is usually a problem beginning traders face when they’ve yet to discover their bread and butter.

Hate this list? Love it? Either way, hit me up with some of your boneheaded mistakes and I’ll add them to the discussion.

Sincerely,

Greg Guenthner
for The Daily Reckoning

The Daily Reckoning