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This column was originally published on RealMoney on Aug. 11 at 10:57 a.m. EDT. It's being republished as a bonus for readers.

Over 10,000 equities, futures and other instruments comprise the U.S. markets, but misinformed traders gravitate to the same dangerous plays over and over again. They get so hypnotized by the big numbers they convince themselves that momentum dogs are the only way to take money out of the market.

Nothing could be further from the truth. While traders can book big gains over short periods playing these hot stocks, it's also a direct pathway to washing out of the markets.

In fact, the same plays that fill their pockets now will ultimately lead to their demise.

You know why, if you've been reading this column for a while. It's all about risk. Any stock that shows the potential for huge gains also carries the risk of huge losses.

Now it's a different ballgame for highly disciplined players with long-term track records. But most folks playing these stocks are losing traders stuck hopelessly in a gambling mindset.

Too Risky

I've been perusing the stock boards, reading the tall tales about momentum traders playing the first three days of

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This instant pump-and-dump favorite came public on Friday at $60, hitting an astounding $151 on its first day of trading.

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But taking a position in this stock was dead wrong for 90% of all market players. Why, when it produced such fabulous gains in just one day? The answer is simple and sobering: The risk of being on the wrong side of the action was far too great, especially for inexperienced traders.

It's said there's a loser for every winner in the financial markets. But you wouldn't know it by reading the boards about this hit stock. Unfortunately, the folks who dominate these boards won't admit it when they get clobbered because they're trading over their heads. So there's a constant drumbeat that making money on these crazy stocks is both easy and desirable.

Success is often far worse than failure with today's momentum dogs. For many, booking windfall profits on unlocked an unhealthy sense of invulnerability that induces marginal traders to look for identical plays in other hot issues.

These folks fail to recognize their initial success for what it really was -- dumb luck. Instead, they believe they've found the Holy Grail, and try to parlay their trophy into fresh profits on new momentum dogs.

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Sooner or later, though, the market exacts its revenge and takes away what was given in error. And it doesn't stop there. It then attacks seed money because these traders have become fearless and reckless. In the end, their lucky profits wind up costing more than a string of bad trades taken for rational reasons.

Beware of Tasers

I was doing a seminar in New York last year, discussing the importance of trading discipline and proper position choice. A gentleman with a strong local accent stood up in the middle of the crowd and told me my approach was a waste of time because there was one play that would fulfill their financial needs. The stock was




The gentleman didn't realize it, but he had just given the crowd its most important lesson of the day. They saw firsthand how greed and illusion can affect our decision-making as traders.

By the way, I never traded that stock because I couldn't get my hands around its considerable risk. I'd stare at it while it moved around 3 or 4 points without going anywhere by the close. This observation led me to more reliable positions with slower-moving stocks.

Many traders pound the tables for this type of crazed volatility. But most of these folks are also terrible market-timers. It's great that stocks move around in big numbers, but it doesn't matter unless you buy low and sell high. Let's face it: That particular skill is more elusive than it sounds.

So how should serious traders choose their stock plays each day? Here are four tips.

First, control your beta and you'll control your risk. Choose stocks that fit your ability to lose money. Watch the ticker and see the ranges built by these issues on a typical day. If the price movement scares you, stay away at all costs.

Second, control your position size. You can be a real player and still get a good night's sleep as long as you don't take too many shares into your account. So if you're absolutely obsessed with trading, buy small lots instead of swinging for the fences.

Third, honor your experience level. Don't even look at these stocks until you've been trading profitably for at least two years. Of course, that rules out the majority of all traders. Losing traders should spend their time learning to make money on slow movers rather than trying to take back all their losses playing the lottery.

Finally, consider your long-term goal in the financial markets. This can be usually stated in one word because it's the same for all traders: survival. You have more input on this last item than the other three combined.

Simply stated, you have the option of sitting on your hands and not taking inappropriate risk.

P.S. from Editor-in-Chief, Dave Morrow:

It's always been my opinion that it pays to have more -- not fewer -- expert market views and analyses when you're making investing or trading decisions. That's why I recommend you take advantage of our

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Alan Farley is a professional trader and author of

The Master Swing Trader

. Farley also runs a Web site called, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback;

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