Are you learning to day trade and you just seem like to be taking one step forward but two step back, you might be making these 5 deadly trading mistakes. Learning to day trade was probably was one of the hardest thing I have ever learned.
There is a huge learning curve involved. From building a up discipline to wake up a few hours before the market starts, to analyzing news and headlines, and spending hundreds of hours of screen time, reading waking up early as possible, hundreds of hours of screen time.
I have been trading for more than 2years now and I have literally made every single mistake that resulted in huge losses.
Because the stock market is unforgiving, the moment you think you know it all, is the moment you are going to fail.
So in this article we will be talking about the top 5 day trading mistakes beginners make in the stock market and how you can identify and fix them and save your trading account from blowing up.
The day trading mistakes I am going to explain in this article are:
1) Not have a trading plan.
3) Mistake of not spending enough time on paper Trading.
4) Scaling up share size too quickly.
5) Following chat room alerts.
1 ) Not having a trading plan :
There’s a saying in the outer world that when you fail to plan, you plan to fail. And that couldn’t be true for day trading.
I was very guilty of this when I first started, I remember seeing a low float penny stock running from 4 dollars to 6 dollars within minutes and you feel all excited. My heart’s beating fast I’m sweating on my forehead and my brain screaming “I must buy now, or else I will miss this”. Buy now and ask questions later. Once a while you may get lucky and make few bucks here and there, but all it takes is one instance to be at the top , you buy it there and then the stock completely plunges and I loose 10% or 15% of your entire account. Happened with at the start. Most of have done it in the past, due to FOMO the fear of missing out!
Before getting into a trade, you must create a trading account.
I spend 1.5 hours to 2 hours before the market opens, planning each day for my trades. You cannt just jump out of the bed before 10 minutes before the market opens and expect to have a shower of money. That doesn’t happen!
This building a plan and a strategy takes time but it is very useful for day trading or even swing trading. Creating a trading plan will help you avoid FOMO. By taking time to write down your thesis, risk reward and exit plan, you are already setting yourself up for a much higher probability of success.
Your trading plan must include your bias long or short, all the levels over and under, your exit plan and even your stop losses if you are wrong.
Yes that’s right.
Part of the trading plan especially in this volatile market is planning for your loss especially in these times of volatile market.
Because it is only after you plan and you know your probable losses, you can control your losses somehow.
Planning for your trade is 90% of the work in day trading. And once the market opens, I spent the rest 10% of the time executing those plans.
And it is just as important to follow your plan as it is to make one because if you don’t follow your exit plan, it can easily lead you to your next mistake.
Most new traders focus on trading to make profit instead of focusing on charts and plans. Imagine you have made a few good trades on the day, 100 dollars here and 400 dollars there.
Your PnL on the screen corner says you have made 500 dollars on the day so far. You are feeling good now but you really want to hit the nice round number of 1000 dollars. So instead of taking a break in the middle of the day, you keep trading.
And your start entering postions that are perhaps not in you’re A+ setup. You start loosing that 890 dollars went down to 750 dollars then to 400 dollars and then to 100 dollars.
This is where you start to get emotional and extremely frustrated.
Because now you are not only hitting the 1000 dollar mark but you are also going down from the 890 dollar profit you gained an hour ago.
Over trading leads to emotional trading which leads to eventually revenge trading,
This is where your mind just keep going back on the same stock and attempting to make that money you have just lost!
Well we all know how this story ends when the closing bells ring. You have gone up from 890 dollars up in a day to down to – 300 dollars on the same day.
This is the scenario where you know how to make money in the day trading market but you couldn’t keep it because greed overtook to you by your overtrading habit.
Few tips to prevent overtrading:
- Follow your stop loss. Suppose if you are planned to get out from a trade at 8 dollars then do it. Yes you will be taking a loss, but it’s a planned loss within your risk profile from your trading plan.
- Next walk away from your trading computer during lunch hours, At these times the stocks are consolidating in a tight range with low trading volumes, and not much action happens.
- Focusing your trading at the opening and in the power hour will allow you to get the meat out of the move and not waste time and money on set ups that won’t be profitable due to lower volume.
The most important thing when you are feeling distressed it’s time to move away from your trading station. Most emotional trading leads to even bigger losses.
So when it’s time that you have the emotional feeling kicking in it’s time to take a break the market will still be back, but when you are back tomorrow with clear head, you can trade well and earn more.
3) Mistake of not spending enough time on paper Trading
Yes, before going live people do not spend enough time on paper trading. We all know that everyone want to make money fast but many people without doing simulated trading for first few months they just straight into jump to live trading. This is why most beginners face huge amount of losses and they think either share market is a total gamble or day trading is not for them.
Paper Trading, which is trading with simulated money but on live charts. This allows you to learn to plan for your trade about which we have talked about above in this article. This really helps to understand all the technicalities and the broker interface. Almost all the broker interfaces allow simulated trading or paper trading nowadays.
There is nothing more frustrating than accidentally selling a fully position when you meant to scale out or not knowing how to change your long orders to short.
You have to be disciplined and treat the paper trading money as real money. That means if you are going to be funding your live account with 5000 dollars, then paper trade with 5000 dollars not that default 1 million dollars many brokerages allow you to have.
Paper trading will also allow you to get screen time in the market and learn your technical analysis skill for price action.
We all have seen chart templates with these clearly labelled candle patterns that makes trading seem so simple.
But in my opinion, memorizing patterns is all hindsight, price action is the real time indicator. Watching how candle charts are developed into patterns with the volume, and observing each stock trades reacts to various news these are the kind of experience that takes time in front of the screen to pick up and all the traders have to learn at their own pace.
4) Scaling up share size too quickly
I remember how happy I was when I started earning 100 dollars a day, which in turns to make 500 dollars a week. I was excited and feeling pumped. Not bad for couple of hours of work and heading out to some other work in the day. These small gains add up and I was still earning income from my regular job.
So I decided to use 10 times more than my normal size of shares then I would be making 1000 dollars a day, which in a week would be 5000 dollars, which was a huge amount of money for me.
It seemed like a good plan for me. Well but this overconfidence with sizing didn’t go too week for me.
Not only I lose the small 100 dollar wins from the last few weeks. I completely blew up my account, because you see I did not take into consideration the emotional stress that was coming with scaling up. You see if my risk was 30 dollar loss to make 100 dollar a day, suddenly the risk is now 500 dollars in order to make a 1000 dollars. And while I wanted that nice number of 5000 dollars into my bank account, I was not ready to loose 2000 dollars a week to make 5000 dollars.
When you scale up position sizes too quickly that will lead to emotional trading. So traders esp. day traders, please take your time with sizing give it months before even adding a quarter size. Take it slow, this will allow you to mentally prepare for the possible bigger proportional losses.
5 ) Following chart room alerts
First of all I would like to say that it is good to learn with like minded trading community of traders and receive feedback, ask questions and sharing your trade ideas.
But following blindly alerts for buying and selling would not let you become a day trader. You will be always relying on others for profit and losses.
Most of these chat rooms will just ask to buy and sell a particular stock at a particular price without getting into the details of why you should do so.
Sheep herd mentality
They create followers, like sheep, who blindly do what they are asked to do. Many times most of these followers lose a lot of money because they don’t even know why they bought that particular stock in the first place.
So when the stock drops a little bit they all hit the bit and exit out which in turn gives huge loss.
I’m not saying that you can’t make any money out of these chat room alerts, if you are alert enough and you have a good internet connection may be you could but in the long run you will lose your money if you follow them especially if you are into these chat rooms where low float stocks, such as penny stocks are recommended. These chat rooms have thousand of followers, these are especially called chat room pumps.
Let’s picture this in your head, the moderator of the group buys tens and thousands of low float low volume stocks such as penny stocks. To know more about Penny Stocks, click this
Then he alerts thousand of his followers to buy and guess what, because these stocks are low volume these stocks surges to a 20% , 30% within 30 seconds because all of followers bought the shares with him.
Seeing the price hiked, the moderator sells. Then he alerts everyone to sell, after he had closed for a locked in profit, then all his followers tries to sell at same time. Then if you are lucky sheep and if you are fast, you have made some money. But the majority of those followers would be stuck at the very top holding the baggage of the stock.
This happens with many people who want fast cash.
Summary of this article :
Understand this, trading is NOT easy, but it can be LEARNED if you are willing to put time and effort. You will need to be involved in trading with all your hard work, patience and sacricfies then only you can taste success.
Caitlin has done her Masters’ in finance. She loves to write about finance, money making and on tech that would affect us in near future. When she is not writing in her favorite coffee shop, Caitlin spends most of her time reading, cooking, traveling the world, visiting Walt Disney World, and catching her favorite Broadway shows. If you want to know more about her, do follow her on Twitter. Just click on the Twitter icon in this box.