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  1. Home
  2. / Investing
  3. / Stocks

Don't Fall for This Easy Trading Mistake

With breadth negative and the indexes up, here's the investing trap that could get you if you're not careful.
By JAMES "REV SHARK" DEPORRE
Jul 07, 2021 | 01:37 PM EDT
Stocks quotes in this article: XBI, ARKK, FBRX, UGRO

The indexes have bounced back, but breadth is still solidly negative, and certain areas of the market remain very week. For example, biotechnology -- according to the SPDR S&P Biotech fund  (XBI)  -- is down 1.6%, and breadth in the ARK Innovation exchange-traded fund  (ARKK) , which is mainly high-beta growth names, is running 12 advancers to 62 decliners.

There is plenty of weakness out there, and the bounces in the indexes are deceptive. Many stocks are struggling and still looking for support. The good news is that earnings are coming soon and should be a catalyst for some stocks. Right now, the selling is correlated and based on sectors and macro factors. This is the opposite of a market for stock pickers.

Eventually, the cycle will turn again, and astute stock picking will be rewarded, so the important thing to do now is to work on watch lists of stocks that you are going to focus on as conditions change. That does not mean buying them right now, but I often will hold smaller positions and then wait.

The easiest mistake to make in the sort of market action like we have right now is to average into a position too quickly. For example, two stocks that are very thinly traded that I want to accumulate are Forte Biosciences (FBRX)  and Urban-Gro (UGRO) . If you are already in these names too big, then you are likely cursing the action and are more concerned about escaping the pain rather than taking advantage of it. This is where traders often suffer the biggest losses, because they are trying to manage the pain rather than taking advantage of the ugly situation.

The best way to deal with this is to reduce the position quickly when it struggles and then shift the focus to finding a new entry. You want to be more worried about finding a buy point rather than debating if you should be selling. You have to change the mindset from defense to offense. Suddenly that poor action becomes an opportunity rather than a source of misery.

One of the hardest things to do in trading is to build substantial positions at the right time. Constantly adjusting positions is the only way you can do and still keep emotions under control.

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At the time of publication, DePorre was long FBRX, UGRO.

TAGS: Investing | Investing basics | Stocks | Biotechnology

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