Day trading is a risky yet potentially lucrative profession that has grown in popularity over the past few years. As the barriers to entry continue to fall and the amount of readily available information increases, people from all walks of life are trying their hand at trading the markets in an attempt to become their own boss with the potential to work from anywhere in the world.
However, as you might have heard, becoming a successful trader is tough. So much so that only a reported 5% of traders are profitable over a 12 month period, but why is that?
Well, the unfortunate truth is that most people tend to fall for the same basic mistakes, time and time again. Even if you’re equipped with the best strategy in the world, it counts for very little if you fail to apply solid trading fundamentals every time you sit down at your computer and enter into a trade. On that note, here are four of the most common day trading mistakes that you need to avoid.
1 – Overtrading
When it comes to day trading, one of the most frequent errors newcomers make is overtrading (entering too many trades). Most of the time, this is attributed to a lack of discipline and an overeagerness to enter into a position. You see, most people are unable to sit idly by and watch trading opportunities come and go, which leads to impatience.
Instead of waiting for a trade that matches what the technical analysis indicates, many traders tend to see setups where they don’t exist and even go against their strategy just because they can’t handle the boredom or suffer from FOMO.
To add to this, trading several stocks at the same time is never a bright idea either. Yes, concentrating on one position can cause you to lose out on another, but it’s much more productive to devote all of your focus to one trade in order to maximize your prospects of making a profit. After all, the aim of this game is to be as accurate as possible over a long period of time. When you’re in a rush to make a buck, you’re more likely to make mistakes.
2 – Not setting a stop loss
Thinking of how and why your trade will go against you may seem like a negative line of thinking to have when entering a position; however, it’s absolutely vital that you do. One of the cardinal sins that traders make is cutting their winners short and letting their losers run. In other words, they do the polar opposite of what a winning trader should do.
The reason for this is simple. We are human beings, and our emotions cloud our judgment. We tend to want to lock in wins when we get them, and we can’t handle losses. Sometimes, this leads traders into a state of denial where they believe their losing trade will turn around, praying that it will make a U-turn and end up in profit.
While this may work every once in a while, eventually, it will lead to you busting your account and going broke. Here’s the truth, you can’t win them all. Losing is part of day trading just as much as winning is, and having a contingency plan for when a trade goes against you is one of the key differentiators between the pros and the losing traders.
Putting a stop-loss in place for every trade drastically minimizes your risk, and the best part is that it takes the emotion out of the equation. When the price hits your SL, it will automatically execute, and you don’t need to rely on your discipline to get out. As they say, “hope for the best, but prepare for the worst.”
3 – Trying to catch the bottom/top
Many people mistakenly think they know when the market is going to turn. They try to time the market and hop onto a trade when they believe one particular asset has reached the “top” or the “bottom.”
They see the market going down, down, and down, and think to themselves, “surely it can’t go down any further,” before entering into a long position. However, as many expert traders will tell you, this is like trying to catch a falling knife.
Even though it may appear that the stock is rallying and it looks set to start an uptrend, you must wait for confirmation signals first. Nine times out of then, you will not catch the bottom or top of a trend, and if you do, it’s just pure luck. Remember, “the trend is your friend.”
4 – Trading illiquid assets
This one is more relevant for the people who like to trade penny stocks (which is one of the places most beginner traders tend to start out). If you trade illiquid stocks, you leave yourself open to a whole host of potential dilemmas. Firstly, the spread of obscure stocks is usually very steep, making it almost impossible to make a profitable trade.
Secondly, if you buy a stock with a tiny trading volume, you might not be able to offload it when you want to close your trade. This will leave you holding onto a position for longer than you wanted to, and in some cases, you might lose all of your investment.
Finally, low market capitalization assets are extremely vulnerable to manipulation. Market makers benefit from traders who are overly keen to get in and out of the market, so they take advantage of low liquidity. Others devise “pump and dump” schemes, in which they raise the price of their stock in a short period of time before selling it to unsuspecting buyers at an artificially inflated price.
Whatever trading strategy you use, keep these four common mistakes in mind at all times and aim to apply solid trading fundamentals wherever possible. Your trading balance will thank you for it!