Buyers—and sellers—beware: Trading mistakes can be costly, but they are avoidable.
As much as I love collecting charts of terrible trades, it really does break my heart to see folks clearly losing money because of simple mistakes.
My email box is sometimes full of proof that investors get burned by not paying attention to the basics. And if I had to categorize the big mistakes, I’d put them into four buckets:
1. The Accidental Stop
I’ve written about how stop-loss orders can be problematic when markets get frothy. But it’s not just a mini flash crash that can trigger a stop, it can be something as simple as a dividend.
Take a look at this chart for the iShares Global Telecom ETF (IXP | B-80):
With telecom companies on a tear this year, it’s entirely reasonable that a cautious investor might have put in a round-number stop-loss for $65 before 2014 is over. The idea would be that if the bottom fell out on what was an otherwise nice-looking chart, your $65 stop would turn into a market order, you’d liquidate your position and lock in gains.
And doesn’t it look like that was a good idea in June? Nope. IXP continues its attractive 18-percent-a year trajectory. The problem is that telecoms tend to pay big dividends, and those dividends get paid out in distributions.
In fact, IXP made a $6.37 distribution in June. Most investors see that as a good thing, but most trading systems don’t adjust your sleeping stops for distributions. As far as your stop-loss is concerned, the price dropped $6.37 in a nanosecond. And, poof!—now you’re out there screaming “sell sell sell!” whether you wanted to or not.