It’s easy to get caught up in the euphoria of strong moves on the new highs list. But, avoiding stocks that are extended is critical to long-term successful investing.
When you buy extended, you run the risk of getting caught in a normal pullback as a stock settles back down to a moving average. This is often referred to as “reversion to the mean.” The difficulty lies in making a proper decision on how to react. Justify the growing loss as “normal behavior” and you could take an oversized loss that damages your portfolio.