When you’re first learning to day trade, you’re going to make mistakes. However, in order to be a successful trader, you need to minimize those mistakes, as well as learn from them. Now, there are many mistakes that beginner day traders make, and nearly all day traders have committed one of these fallacies at one point or another. If you commit too many mistakes, you could be destined for failure. That said, you should avoid these 5 common day trading mistakes, which should make you a better trader.
Avoid These 5 Common Day Trading Mistakes
Letting Losses Amount and Cutting Winners too Early
Let’s face it, we’ve all been stuck in one sticky situation at one point or another. We go long a stock, only for it to go against us and we hold on too long and let losses amount. If you haven’t had this happen to you, that’s great. However, if you’re ever caught in a losing position, you need to learn to cut your losses quickly.
Successful traders admit their wrong and are able to take a small loss quickly. Moreover, they don’t continue to think about their losses, they just move on to their next trade idea. Beginner traders tend to hold onto a losing position for too long, hoping the trade will eventually work to their favor.
Another one of the five common day trading mistakes is cutting winners too early. Ever hear the term, “Let your winners ride”? Well, if you want to be a profitable trader you need to properly risk manage your positions, and let your winners run. For example, if you’re long a stock and it starts you gain momentum, you might want to move your stop-loss price up and consider holding onto the position. This way, you could take part in the entire move, rather than selling too early. I’ve made this mistake before, selling out of a position too early, only to notice it went up significantly higher.
Let’s assume you buy Iqiyi (IQ) because it broke out of some resistance, and you think it could reach $18.50. Now, once it gets to your target, you plan to sell all of it. However, the better play would be to sell half and then move your stop-loss to your entry.
Here’s what would’ve happen with the position. In general, it’s better to let your winners run, and cut your losers quickly.
Trading Without Stop-Losses
Stop-loss orders are essential to trading. It helps to maintain discipline while trading, and you won’t have any emotions or be stubborn with your positions. When you have a tight stop loss, you mitigate the problem of letting your losses amount. Now, there are some problems with a traditional stop-loss order. Depending on whether the stock is moving fast, your stop could potentially get executed below your stop price.
That said, you need to make sure you understand order types and look to implement stop-loss limit orders. With this order type, you’re able to set a stop price, and it would get triggered if the stock reaches that price. Thereafter, you would set a limit price, which is the price at which you would sell your long or cover your short position.
Trading Without A Plan
Great traders will tell you, “Create a plan and trade the plan.” If you don’t have a trading plan, it’s going to be hard for you to become profitable. If you have a plan, you’ll know exactly where to buy or sell short, stop out and take profits in your positions.
Here’s a look at some of my trading plans and my thought process.
New Catalyst Swing names (1 – 4 week holds) I am watching…
Catalyst Dates: Will complete DSMB analysis in July
Buy Zone: $.29 to $.31
Profit Zone: $.37 or higher
Stop Zone: $.27 or below
Catalyst Dates: FDA Approval date of November 2, likely to have an Advisory Committee meeting announce beforehand
Buy Zone: $1.70 to $1.90
Profit Zone: $2.20 or higher
Stop Zone: $1.50 or below
Tetraphase Pharma (TTPH)
Catalyst Dates: FDA Approval date of August 28th
Buy Zone: $3.90 to $4.10
Profit Zone: $4.75 or higher
Stop Zone: $3.70 or below
Notice how each of these trading plans have a reason I want to buy, the entry area, where I would take profits and stop out. Once you develop a plan, trading becomes easy and it’s all left up to you to execute. If you don’t have a trading plan, chances are you could let losses amount and let a position go against you, after you’ve been up in it.
The Bottom Line
When you’re learning to trade, you need to avoid common day trading mistakes. When you’re able to minimize your mistakes, you place yourself on the road to success. Traders who don’t avoid these common day trading mistakes set themselves up for failure. That said, learn to cut your losses quick, hold onto winners, use stop-loss orders and develop a trading plan.
Kyle Dennis runs Kyle Dennis’ Biotech Breakouts (biotechbreakouts.com). He is an event-based trader, who prefers low-priced and small-cap biotech stocks. He’s also using his knowledge and looking to multiply his capital through options trades.
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