Today, we’re going to cover four chart reading mistakes you might be making. These mistakes are quite common, so I’ll pinpoint a few to help you avoid them.
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Now, let’s dive into these common chart reading mistakes.
1 – Getting Bullish with No Trend
One major mistake is going bullish in a market with no clear trend. Many traders jump into positions during choppy markets, but this can be risky, especially if you’re new. For example, let’s look at Adobe. You might notice a few small upward moves, but the market overall is sideways, which means there’s no clear trend.
An advanced trader might take the risk, but if you’re just starting out, waiting for the breakout or re-test is a safer approach. The key is to look for an actual trend, not just minor pops.
2 – Buying on an Extended Move
Another big mistake is buying when a stock is already overextended. Just because a stock has been going up doesn’t mean it’s a good time to buy. Let’s look at Cracker Barrel. The stock moved up, but after such an extended run, it’s likely to pull back.
Most people buy stocks far away from their moving averages, but it’s important to remember that stocks often return to the average. This means buying during an extended move can backfire.
3 – Low Risk to Reward
Always check your risk to reward ratio. If you’re risking a lot to make just a small profit, it’s not worth it. Let’s say with Apple, if you’re risking $7 to only make $2, the risk-to-reward ratio is too low. Instead, look for opportunities where your potential reward is much higher than your risk.
4 – Plan to Be Wrong
You won’t always be right. So, what’s your plan if a trade goes against you? Will you cut your losses, hold, or add more shares? It’s essential to have a plan in place for when things don’t go as expected.
For example, if you’re bullish on Pinterest but the stock doesn’t break out as expected, what’s your next move? Having a plan will help you handle the situation with a clear head.
Checklist for Better Trades:
- Are we in an uptrend?
- Is the move too extended beyond normal?
- What’s the risk vs. reward?
- What’s your plan if the trade goes wrong?
If you keep these things in mind, you’ll be in a much better position to make successful trades. If you want to dive deeper into these concepts, check out my Swing Trading Full Circle course on the Trader’s Fly website or any of my other classes.
Thanks for watching, and I’ll see you in the next video!
