With the incredible volatility over the past few months so many traders have gotten burned by getting caught up in attempting to ‘call’ the reversals in the markets and in individual stocks that have been pushed in a particular direction. I’ve sat in day trading rooms on Wall Street and have heard people screaming that “this has got to be the bottom!” The chances of an online trader actually calling a reversal are very small. If a day trader executes trades that have a very slight chance of success, then they must be very quick to exit that position if they are found to be wrong. Online trading makes it too simple to keep trying the same thing over again, but the day trader must remember to limit losses promptly when bucking the trend. Although the reward of catching a market reversal is great so is the risk. If you are trying to catch the reversal of a particular stock, try not to hold for long periods of time and limit losses.
When those involved in online trading attempt to catch a reversal in the stock market, they invariably lose sight of the overall conditions that are currently working in their favor. The concentrate too much on the risky plays rather than the smart ones. A day trading mentor once explained to me “when trying to catch a bottom in the market, if wrong the trader loses out on the opportunities to short rallies where the percentages are much greater.” So, with that in mind you not only may have a series of losing trades, he or she may not have been able to take advantage on the potential profits that could have been had. In online trading, it is important to recognize the trend in the market and take advantage of the moves, overall and of specific stocks, do not risk the entire ballgame in order to hit the all too infrequent home run. Remember, homerun hitters, usually also have the greatest amount of strikeouts as well.