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The Perils of Bulletin Boards for the Novice Investor
Recently a 15-year old boy was caught manipulating stocks by posting hundreds of false messages on an open bulletin board. His lawyer said, "He made far more than he had to pay in fines," meaning, crime does pay, if you're 15. His father said, "I'm proud of him." This type of crime is not going to go away anytime soon with this type of admiration for the criminal.
If you act on advice you read on an open bulletin board or chat room (meaning free or available for a very small entry fee), you are open prey for those that choose to manipulate the system. One common scheme is the "Pump-and-Dump, when an individual or team purchases hundreds of shares of a low valued stock, then posts numerous (sometimes hundreds) messages, under multiple aliases, to create the illusion that the stock is a winner. Many investors quickly react to this happy news. Some fully aware and trying to get in on the action, and others that innocently believe the news, hoping to "get rich quick."
The sudden influx of new buyers drives the stock's price higher, at which point our Pump-and-Dump expert and all the hanger's on, sell their shares, causing the price to plumet. The sudden loss of value causes a rush to sell, and the stock collapses.
Who gets hurt? Those that think chat rooms and bulletin boards are the place to get "hot" tips. Greedy perpetrators are easily caught, but what about those schemes on a lesser scale? If you don't think it is happening, watch how often a stock is hyped, rises, then abruptly falls with no explanation.
A better plan: Do your homework. Learn good trading skills. Stay out of "public" rooms for your stock tips. If you are new to trading or investing, follow this path:
1. Learn the terminology. Check out our online glossary. This is a basic glossary with terms you'll likely encounter when beginning to trade or invest.
2. Read introductory books on trading and biographies about great traders. See our suggestions and favorite trading books at the Daytrader's Bookstore.
There is no less expensive way to learn than books.
3. Choose a time frame. Give yourself a break here; would you climb Mt. Everest without proper training? Choose a longer time frame at first, and give yourself time to get familiar with the charts and indicators.
Daytrading - all open positions are closed at the end of the day. Trades held for a few minutes to a few hours.
Swing Trading - primarily holding trades from 1 to 5 days.
Longer-term Trading - holding for weeks or months.
Investing - holding for months to years.
4. Find an approach that suits your psychological trading style. How can you determine your trading style? Take this simple test:
If you scored 12 - 15, you may be too excitable for daytrading. Try swing trading, or investing with a longer-term objective.
If you scored 6 - 9, swing trading would be ideal, but you can consider daytrading. Study the psychology of trading to overcome your limitations.
If you scored 0 - 3, you would make a great daytrader. You are
likely calm, level headed and make fast decisions based on the facts.
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