When you see stock charts like these ones, have you ever wondered what led to the peaks and troughs?

Do You Know Your Stock?

Good traders and investors will follow a stock for a certain period of time to understand events that drive a stock price’s fluctuation, then to execute their trades based on expectation of future events. A common mistake is to trade without prior knowledge of the stock’s behavior and relationship with different events. I call this spray and pray: you may win here and there, but you can’t win forever.

“Risk comes from not knowing what you are doing.” — Warren Buffett

Take a look at the Twitter chart below:

Imagine you are at scenario A, standing at the peak right after the price spike, which is caused by Twitter’s acquisition rumors. At this point in time, knowing that another technology giant would pay a much higher price to buy out Twitter, the idea of owning Twitter stock would seem feasible. However, the good time is short. At scenario B, news and media confirmed that the buyout offer was just a rumor, causing the stock price to drop back to where it was several weeks ago, and thousands of investors suffered a terrible loss.

Could they have avoided the loss? Possibly. Take a look at scenario C and D, it’s actually the exact rumor scenario as A and B. Knowing the stock price went through a boom and bust for the same rumor, would you still have bought into it this time around?

In fact, Twitter went through the same rumor scenario several times in the past year. You may still decide to invest after being aware of the situation, but at least you would be making an informed decision knowing the risk involved.

2 Reasons Why Beginner Traders Make This Mistake:

1. You are drowning in the sea of information

provided by news, social media, blogs, etc. As a stock trader, you have no real access to the factual information until it’s too late. Therefore, oftentimes you are trading on speculative information.

When you first hear about a stock, you rely your full understanding from current news and media coverage. Financial news tends to be opinionated and exaggerated, and typically do not give strong emphasis on past events.

Without any prior knowledge and clear understanding of the stock’s past behaviors, you are left to trade with the information that is currently available to you, causing you to make uninformed decisions.

2. Past data not readily available.

It requires a lot of manual searching to put together a list of recent developments; literally, you have to search each spike and fall by its date and stock symbol, and then sort out the relevant articles that give you the correct information. To make it short, it’s a very time consuming process.

2 Alternatives / Solutions to Stop Bad Trades

1. Get To Know Your Stock!

Track the stock for a good 1–2 months before making a decision to buy. You should do your research to understand its behaviors, and know what drives its performance.

Be aware that events driving one stock’s price may not drive another. For example, Tesla’s spikes and falls are strongly correlated with company CEO Elon Musk’s PR strategy. However, for a stock such as Twitter, they are largely affected by buyout rumors and earning releases. Tesla buyout rumors tend to have very little impact on its price performance, knowing that it’s unlikely that Elon Musk would sell his company to anyone other than himself.

2. Check out StocksWaves!

StocksWaves tags valuable insights of spikes and falls so that you can gather all key indicators on a single stock chart.