While becoming a successful day trader isn’t possible without making mistakes and learning from them. There are plenty of serious pitfalls that you can be aware of in such a way that it makes you less likely to have to experience them yourself. Keep the following in mind and remember, forewarned is forearmed.
Chasing bottoms and tops: There are certainly some strategies out there that are effective when used near the turning points of existing trends. These are in the minority, however, which means that picking bottoms and top is, more often than not, a risky proposition. Unfortunately, it is an all too common mistake for traders to invest money into securities that are either too low or too high, gleefully ignoring the 2 percent rule as they do so. This impulse should be avoided like the plague and replaced with a focus on major inbound price moves instead. Sticking to one side of markets that are range-bound will lead to better long-term results at least 90 percent of the time.
Not having a good exit plan: It is common for new day traders to have a plan when it comes to getting in on a potentially profitable trade without having an equally solid idea for when they are going to get back out. This then leads them into scenarios where they get out too early and miss out on some easy money or stay in too long and either end up with an investment or end up being forced to take a loss despite the promising start. If you are having a hard time coming up with the right exit points, the easiest place to start is by focusing on adding detailed technical specifications to your exit strategy. After you have put these into play, it is important to not stick with them blindly and to instead change them up as need be based on the changing market environment.
Trying to get even: While most new day traders start out with a plan of some type, they often make the mistake of letting their emotions take over and when that happens it is very easy for a plan to go out the window. It is important to keep in mind your trading goals as well as your long-term plan when this occurs as trying to get even with a specific stock, either by doubling down or by holding onto it well past the point where logic would dictate that it is time to get out, will only lead you to a loss far more than it will work out in your favor.
This is why it is so important to focus on the numbers to the exclusion of all else which means removing your ego or self-esteem from the picture entirely. Focusing on the price action to the exclusion of all else will make it easier to block out aberrant thoughts relating to magic numbers or breaking even, which will naturally improve your overall trade results, possibly to a significant degree. Keep in mind that determining whether a day is a success or a failure isn’t something that can be done until the final trade for a given day has been completed.
Sticking with relative trends: If a trend is already well-defined in the market then it is entirely possible that it is going to continue long enough for you to make some money off of it but it is far from a guarantee. The market will naturally fluctuate up to 20 percent of its current average with very little warning, before settling back to the current standard. This means that if you recklessly jump onto a specific trend without doing the required homework you will frequently find yourself making a momentum play that is never going to go anywhere.
Before you make a move regarding a specific trend, there are three distinct timeframes you are going to want to consider first. If you are prone to trading in the short-term then you are going to want to keep an eye on the weekly hourly and daily charts. If you prefer holding onto trades for a longer period of time then daily, weekly and monthly charts are typically going to be more useful.
Being too focused: Many new traders get so focused on a specific trade that they forget that no trade exists in a vacuum. Not keeping this in mind is a surefire way to hurt your overall successful trade percentage with losses that are, by and large, avoidable. The more profitable solution is to instead keep a strong macro view of any trades you are considering working with. Keeping tabs on the market in this way and looking for potentially profitable trades is a great way to track general derivatives. These derivatives are crucial when it comes to managing the underlying conditions that occur between markets while also make sure they are currently moving in the same ways. With that being said, it is important not take so much of a macro view that you lose sight of what is most important. A balanced mix of macro and micro is always going to yield to the best results.
Letting the opinions of other influence your trading: While every day trader is going to have opinions regarding the best way to trade this type of stock or when to use that indicator, the best day traders tend to avoid this advice like the plague and instead work out their own. The only thing you really need to focus on in order to make the right types of trades in the right timeframes is math and anything else is only going to get in the way. Keep in mind that you want to analyze and observe economic and political events, not get caught up in them.
Timing it wrong: As hard as it might be to believe, finding a trade that is likely to be profitable in your desired timeframe is only half of the battle, you also need to learn when the right time to pull the trigger in order to determine the right results. Making the right move at the wrong time can easily cost you a big profit. How big exactly? Making the right move costs day traders around the world upwards of 10 million dollars per day. This doesn’t mean that you need to wait to make a trade until the stars align and everything is perfect, just that you will want to focus on getting a feel for the best moment to start a trade and then act on it directly.
To do this you are going to need to keep in mind the relatively trend you are following and understand the strength of the market as a whole. While doing this you are going to need to keep an eye on the distribution and accumulation indicators as well. Most importantly, however, you are never going to want to move on a tip or a hunch without taking the time to do the required research beforehand. Anything else is akin to throwing the commissions you paid into a pile and burning them.
Averaging down: While few traders, even those who are new to day trading, start off the day with a plan of averaging down, it is something that they often end up doing because they didn’t take the time to actively plan against it happening. The truth of the matter is that the resources spend holding onto a weak position will almost always cost you more than if you had ended a trade and used those funds elsewhere instead.
Remember, every time you end up with a failed trade that means the next trade needs to be even more profitable overall in order to make the entire day work out to a profit instead of a loss. If you get into the habit of averaging down, and your trading capital wasn’t terribly strong to begin with, then a few days of doing so can easily equate to days or even weeks that will be required in order to just get back to where you were when you started. If you prefer to trade in the short-tern then you will need to be ready to exit a trade the instant that forward momentum begins to slow down, or even worse, starts to move in the other direction instead.
Not factoring in risk and reward before you make a trade: Risk and reward are an important part of every trade. This in no way means they are going to be equal, however, and if you don’t take these differences into account then you can easily make the wrong moves without even realizing it in the moment. If a given trade has enough risk to cost you 2 percent of your overall trade capital then you are going to want to ensure that it pays out at least twice that much (3 times as much is better) to make it worth your while. Likewise, a signal trade that is worth 10 percent of your total trade capital is always going to be riskier than 5 smaller trades worth 2 percent each. Keep your risk reward ratio in mind for every trade or you will wish you had when you find your trade capital dramatically depleted.