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Mistake #4: Worrying About the Past, Not the Future

There are three main reasons why traders lose money. First, they simply have a wrong opinion of the market in a game where money is made and lost based on opinions. Second, traders lose their discipline and the patience in the trade, and lose money for their lack of discipline. A third reason can be explained by an insufficient understanding of the nature of a position's risk and where opportunities present themselves to optimize the position as the underlying fluctuates over time. Out of these three reasons, following rules will help eliminate a large majority of losses in the markets. Here are a few quick rules to follow:

Cost basis keeps your emotions in the stock, and this in part tends to cause people to think constantly about the cost of the position, and not where the position is now. Look at the present and future, not the past of a stock. Many times, on the last day of a seminar, I will show charts of a stock, but not the stock's name. By then, most students can look at a chart, and quickly ascertain a bullish or bearish pattern. Funny, though, when I reveal the stock's ticker symbol, someone in the room will blurt out "Wait a minute, that's not going down, its going up!" More than likely, this person actually owns that stock and is married to it. I found that looking at my positions without looking at what I paid for them actually improved my profits because I looked at the position as of today, and not what I paid for it yesterday. Here's another thing that happens when you worry about the past. It clouds your judgment for the future.

Also, forget about a stock's price and instead concentrate on its growth opportunity (think of a Volkswagen and a Mercedes, and then compare them to stocks). PE and PEG ratios will help you determine if the stock is a Volkswagen or a Mercedes-i.e., is it a cheap stock or a great stock? It's like betting on sports teams. They almost always are not equally weighted, so one carries a point spread with it. Stocks are like that too, but the point spread is the ratios. Learn about PE and PEG ratios, and the best way to use them. We teach these at our AIM classes, as well as how to mix them with chart reading for the best bullish stocks today.

Tom Gentile
Chief Strategist
Profit Strategies Group, Inc.

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