How to Trade Stocks like an Idiot

by Darrin Donnelly on September 8, 2010

“There is no human activity that I know of to which people have a more irrational approach than the stock market.  There seems to be something hypnotic about stocks that makes people behave in a manner which they would never do in any other field of activity.” – Nicolas Darvas, 1977

Are irrational moves causing you to trade stocks like Homer Simpson?

Are irrational moves causing you to trade stocks like Homer Simpson?

When the stock market surges to life, it’s easy to get irrational.

Since last week’s follow-through, almost all Darvas Stocks have been powering higher and higher.  Even Tuesday’s market pullback barely impacted these leading stocks.

When this happens and you see your portfolio steadily growing each morning, it’s easy to start patting yourself on the back and behaving irrationally.  Even the longest and hardest bear markets are quickly forgotten when the newest stocks you’ve purchased start racking up fresh profits.

While self-confidence is certainly an asset to stock traders, I believe OVERCONFIDENCE is the single greatest detriment to trading success.

Simply put: the overconfident trader tends to trade like an idiot. 

The most common move in the idiot trader’s repertoire is to start maxing out your trading account at the first sign of a rally.

For instance, because the first stock you buy shoots up 10% in just a few days, you start noticing several other stocks that have done the same.  You feel like you’re “missing out” on profits everywhere you look.  Next thing you know, you’re fully invested (perhaps even fully margined) and have zero room for error.

Another “trade like an idiot” move is to buy up several “junk off the bottom” stocks.  These are the stocks that may have been good to you a few market cycles ago, or worse, they are the movers of the past that you missed out on and you now want to “get even” with.

The idiot inside your head starts rationalizing ways to add the “hot names” of past market cycles.  For example, “I remember back when Google traded at more than $700 a share, now it’s under $500; surely its ready to rebound.”

It’s easy to look around at the start of a fresh rally and see massive profit potential everywhere.  It’s easy to throw caution to the wind and buy into positions you shouldn’t be buying into.

At the start of a rally, however, you need to fight this common urge to jump into too much too quickly.  Instead, you must be extra cautious as you get back into the market.

If this rally is as strong as the genius trader in your head thinks it is, you will have no trouble finding plenty of great opportunities in the weeks and months ahead.

For some reason, the “idiot trader” inside starts panicking and telling us that we’re going to miss out on the rally if we don’t act fast and act aggressively.

Resist this urge.

A rally can end just as quickly as it begins.  If this happens, and we’re fully invested and holding a bunch of “junk off the bottom” stocks, we’ll rack up losses that can be so severe, it may take us out of the game (either mentally or financially) when a true rally DOES come around.

Remember, the big money is made holding top Darvas stocks during a strong uptrending market.  If this uptrend is as strong as it needs to be, you’ll have plenty of chances to catch a few huge winners coming out of sound bases.

Don’t force yourself into this rally all at once.  Ease in.  Pyramid into positions.  And keep your focus on only the very top Darvas stocks coming out of sound Darvas bases.

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