3 Traps to Avoid in this Market

Like the old Atari game "Pitfall," this market is full of traps that investors can easily fall into. With the S&P 500 and Dow Jones Industrial Average at all-time highs, the sleepy crawl upwards can lure investors into traps. In this article I've identified 3 ways that the market can trick you into losing money.

1) Blindly Buying Dips

It may sound easy enough to jump in and buy a stock on a pullback in this market. After all, the practice has worked very well during the stock market's run off the lows of March 2009. However, as we reach higher highs, the market is likely to become more discriminatory. That is, sector selection and individual stock selection will become increasingly important.

Buying a stock just because it pulled back could prove to be quite dangerous. When buying on a pullback, it's important to make sure there has not been a change in its long-term trend. The pullback could mark the end of a trend and not just a retreat to a support level, especially in the short-term. Always remember: "The trend is your friend, until it ends."

2) Chasing Winners

While buying that hot cloud-based technology stock or electric car company may sound like a great idea, it's also a great way to lose money. We've all heard the old adage: "Past performance is no guarantee of future results" and it couldn't be truer when it comes to individual stocks.

The stock market is always looking forward to the next quarter's and next year's results. Earnings stories that were great in Q1 could quickly reverse as Q2 results and guidance are announced. Make sure you investigate these earnings pictures and outlooks before you jump onto last quarter's winners. Luckily for you, the Zacks Rank system is here to help you identify which of these stocks are in the best positions to continue higher.

3) Taking Profits Too Soon

While nobody wants to let a winner turn into a loser, it's equally as important not to cut off your nose just to spite your face. Let your winners run and cut your losses short. By selling a stock just because it's made a large run, you could be leaving a tremendous amount of money on the table.

Treat each day that you own a stock like it's the first day you bought it. Always have a stop-loss where you will take your risk off the table. You can move this stop-loss up as the stock moves up. This way you maximize your potential gain along the uptrend of a stock. Nobody wants to be the guy that sold Google at $250 just because they thought it went up too fast.

Easy Trap Avoidance

These are 3 of the biggest mistakes an investor can make in this market we have today. Perpetually higher highs can give investors a false sense of security that Mr. Market can easily snatch away at the drop of a dime.

Fortunately, today there's a simple way to stay out of the traps while making the most of this sleepy upward crawl.

Until this coming Saturday, we are re-opening access for new investors to a portfolio service I'm directing, the Zacks Momentum Trader.

Right now, 8 stocks are targeted by our highly selective radar and we are about to pull the trigger on a 9th. Each of these powerful companies has shown momentum, but now our signals are flashing with exceptional intensity.

Today you have the chance to take advantage of them.

Please be aware, however, that this is one of our most exclusive "closed portfolios." Access for new investors has been re-opened only temporarily. It will close again Saturday (Feb. 28), because too much early action on the momentum stocks would make it harder for our members to fully profit. So I suggest you look into this portfolio right away.

David Bartosiak is Zacks' resident technical and momentum expert. He selects stocks and delivers daily commentary for our Momentum Trader.

This article originally appeared at Zacks.com. Republished with permission.

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