The Golden Stock Market Rule – Stop Chasing Losses and Leaping Into Higher Risk Trades

It is easy to say something will come to pass if you say it often enough and over a long enough period of time. Every crash share has its time to stage a relief rally. There is nothing new or revelatory about that. To take this into perspective last week I witnessed an investor whom I had known for a long time who had bought heavily into BP (British Petroleum) using CFDs. He was posting in a forum and making reference to an ever lengthening time horizon for his price targets – within 2 weeks, within 3 weeks and lastly he was mentioning a time frame within 8 weeks.

At that point I squarely pointed out to him that he was giving himself quite a scope to eventually be proven right. After a few days BP’s share price started to move up favouring his CFD trade and he bragged, quoting his own words; ‘Plus what I’ve been posting has come to pass.’

This made me question his belief as his claims were simply ridiculous. What makes you believe to be such an investment guru? What makes you believe that any of your posts represent original thinking? What makes you believe that you have any more knowledge than the average private investor? We all have access to news media. I would have thought after 14 years of trading he would be a bit more humble. Those who have knowledge and experience tend to be a bit more circumspect. They do not need to shout from the rafters in a childlike manner. They do not need to post the same thing again and again and again.

There are no ‘guarantees’ in the stock market. In the current climate the stock market itself seems to be used as safety valves with negative newsflow being the ideal medium to coincide with a large treasury auction or issuance. In a financial world struggling with liquidity and solvency concerns, stock markets are playing second fiddle to the debt markets. Accordingly very few if any shares have the power to move in their own vacuum.

There is one golden rule when involving yourself in the stock markets.

You should not chase losses. You should not leap out of one failed trade that revealed a higher level of anticipated risk and leap into another that comes with even higher risk. In a broadly falling stock market that is one sure fire way to be financially cut to pieces.

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