The 3 Biggest Investing Mistakes

10/17/2011 10:15 am EST


Jackie Ann Patterson

Author, Truth About ETF Rotation

Especially the depths of a down market, even the simplest mistake can sink your profits. Jackie Ann Patterson, who has made plenty herself, outlines what every investor should watch in this exclusive interview with

Jackie, we’ve seen a lot of volatility and the investors are concerned about what to do. What are some of the common mistakes you see investors make in this type of environment?

Well, I see quite a few mistakes, and I’ve made quite a few myself. I think that as the market changes character, it’s sometimes difficult to accept.

I think the first set of mistakes is really kind of denial, of being resistant to seeing the change of character, to seeing perhaps the market fall off, break trend lines, go rocketing downward. It’s easy to say yeah, well maybe it’s just another buying opportunity, it’ll come back. It’ll come back. Then holding onto that long enough where it gets to be a very painful situation.

Then, I think the next mistake is to succumb to the pain—and that’s what has a lot of people selling at the bottom and thinking that okay, well this is just going to continue forever and dropping down tremendously in that case. That kind of brings it full cycle to when something has become very painful, it’s easy to want it to change and to almost project that it will change in a very abrupt manner.

I think historically we’ve seen very few V bottoms in the market. We see a lot more Ws where the price comes down. It lifts up again, it comes down and retests that bottom before really making the advance.

So what we’re looking for is maybe a selling climax of the capitulation and then a little bit more sideways action building a base before we can get back up?

Exactly. Exactly. Likewise on the tops. I think there’s very few As that this market makes. It’s more Ms or things rolling over a soft sort of mountain, so either direction, looking for a little bit more consolidation rather than a huge move.

Any other mistakes that people commit to during these volatile times?

Well, I think that some of the things that we’re used to looking at, some of the roles of indicators, can change over time and in different situations.

One example that I’ve been concerned with lately is volume. You know, I think that we’ve heard a lot about these so-called dark pools of liquidity and transactions taking place over there where we’re not able to see them. That, I think, calls into question the basic volume indicator, so that when we’re seeing an absence of volume, it doesn’t necessarily mean the transactions are not taking place.

When we see a terrific increase in volume, we need to look whether that’s coming off of a small base, or whether that’s just something that I think we have no way of knowing whether that’s something that’s just coming out into the light where it wants to be seen or whether it’s a natural occurrence in the trading.

Have we seen more of a rise of these dark pools of liquidity due to these computerized trading programs?

You know, I think we have. I think we have. I think we’ve seen a change in the overall way the transactions take place, and in the computerized trading and the high frequency trading and the other options available to the larger players in the market to be able to move in and out of positions.

Of course, it’s a need that the larger institutional players have to be able to get in and out of these large positions, and of course they’re striving to be undetected. Of course, those of us who are analyzing the market and watching are striving to detect what’s going on. It’s quite a cat and mouse game being played.

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