Beginner traders are susceptible to some common pitfalls, if they don’t know them. The last thing you want to do is make costly day trading mistakes and limit your potential to become successful in trading. Well, if you keep these three costly day trading mistakes in mind, you’re placing yourself on the road to success. Nearly all successful traders avoid these mistakes. Even if they commit these mistakes once in a while, they don’t make it a habit.
3 Costly Day Trading Mistakes to Avoid
At all costs, you want to avoid these three costly day trading mistakes. When you commit these day trading mistakes, you could be setting yourself up for failure. No one wants that. Beginner traders often trade without a plan, off of emotions and add to their losers. These are just a few of the common costly day trading mistakes you want to avoid.
Day Trading Without A Plan
Now, this isn’t only limited to day trading. Whatever trading style and time horizon, you need to make a plan. One of the main reasons that the failure rate in day trading is high is the fact that traders lose too much money or give up. If you approach trading with grit and avoid taking it on the chin, and try to get better, you could potentially become successful. When you’re first starting out to trade, you need to write out a plan for all your trades. Successful traders like Kyle Dennis and Jason Bond still continue to do this. Although their trading processes differ, they still write trade with a plan.
Your plan could be as simple as your thesis (a few sentences), price range at which you’ll buy, stop out and take profits.
For example, Kyle Dennis’ plan is relatively short. He writes the catalyst date, buy zone, profit zone and stop zone. Here’s a look at one of his trading plans.
Catalyst Dates: FDA Approval date of October 4th with an Advisory
Committee Meeting scheduled for August 8
Buy Zone: 10.50 to 11.00
Profit Zone: 12.50 or higher
Stop Zone: 9.75
Now, his approach to trading biotechs is fairly simple. He identifies his favorite chart pattern set ups, then looks to see the upcoming biotechnology catalyst dates. Thereafter, he identifies where he wants to buy, stop out and take profits.
On the other hand, Jason Bond’s trading plans are more on the fly. He keeps stocks on the radar and uses Fibonacci retracements on penny stocks that have moved a lot. He primarily uses technicals and catalysts to trade penny stocks, which aren’t too difficult to learn.
Here’s a look at one of Jason’s watch lists.
Moving on, another costly day trading mistake is trading off of emotions.
Trading Off of Emotions
You ever hear someone say they’re on tilt? Well, you’ve probably heard this in poker, but it applies to trading as well. When you’re on tilt, you’re making decisions based off of your emotions. You should never let fear and greed control your trading decisions. Now, let’s say you’re long a stock and watched it go up 20% due to a positive news. Well, greed could cause you to think that the stock could run another 20%. However, chances are it isn’t too likely. You might add to your position thinking you could make more.
You don’t want to let greed cause you to chase a stock up 20% when you could be taking profits and avoid the headache. Fear also leads traders to make poor decisions. Traders might cut good trades too early before the stock reaches their stop loss price, thinking the stock could fall for no reason. When you have a plan, trade the plan and stick to it, unless new material information arises.
A lot of traders also trade on hope. If a stock moves against them, they made hold on too long and let it blow right through their stop-loss price, hoping the stock will turn around. You don’t want to do this at all. When you have a stop-loss price, respect it.
Adding to Losers
The third costly day trading mistake to avoid is adding to losers. Unless your plan clearly states that you would add to the position if it moves slightly against you, you should not add to losers. Over time, if you continue to add to losers, the losses could amount. In turn, you could blow up your trading account. When a position moves significantly against you, you have to admit you’re wrong and cut the loser. A lot of beginner traders are stubborn and add to the position, thinking it’ll turn around and they have a better average price. It might work in some cases, but it’s bad practice.
For example, if your trading plan states you want to buy a stock at $50 and add to it on pull backs all the way down to $48, then it’s okay to add to a “losing” position. On the other hand, if your plan does not say anything about adding on pullbacks and if the stock moves against you, then just cut the loser.
The Bottom Line
When you’re learning how to trade, you need to avoid these costly day trading mistakes. You should always trade with a plan and never let emotions control your trading decisions. Moreover, you should not add to losers unless it’s stated in your trading plan. When you avoid these costly day trading mistakes, you could avoid failure in trading and place yourself on the road to success.