Wednesday, April 23, 2008

Why not to bottom pick

Too many traders don’t know why not to bottom pick. Not only that, some of these traders actually think bottom picking is a good idea. This is never the case.

It may be tempting to bottom pick. After all who wouldn’t want to buy a stock when it is at its lowest and sell it when it gets to its highest. The whole buy low, sell high ordeal.

The problem with bottom picking is that it is extremely hard to tell when a stock will make a bottom. The majority of stocks that have been going down in the past will probably keep going down in the near future. That is why most professional traders tell you not to go against the trend. Any successful attempt to find the bottom was probably more luck than anything.

The other thing people will try to do is to get into a stock after a crash when it starts to rally. BIG MISTAKE! Falling stocks will typically rally every now
and then right before they crash again. In fact successful traders will consider sell rallies during a bear’s markets good practice.

What you might want to consider is not buying falling stocks but shorting falling stocks along with buying stocks that keep going up. This way you are not expecting the stock to do anything other then what it has been doing.

Also instead of picking the exact bottom it may be beneficial to wait for the stock to stabilize and form an uptrend again before buying. This may lose the investor the opportunity to get in when the prices are at their lowest but the benefits of profiting more often will outweigh the potential profit you may have missed out on.

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