Beginner traders are susceptible to some common pitfalls if they haven’t prepared themselves against them. The last thing you want to do is make costly day trading mistakes and limit your potential to become successful in trading.
If you keep these costly day trader mistakes in mind, you can avoid them and place yourself on the road to success. Nearly all successful traders avoid these mistakes. Many traders commit these mistakes once in a while, but as long as you don’t make a habit out of them, you can use them as learning experiences to better your financial future.
5 Costly Day Trading Mistakes to Avoid
You want to avoid these five costly day trading mistakes at all costs. When you commit these day trading mistakes, you’re setting yourself up for failure. Beginner traders often trade without a plan, make decisions based on emotions and add to their loses with costly missteps. These are just a few ways of how to avoid day trading mistakes.
Day Trading Without a Plan
The dangers of trading without a plan aren’t limited only to day trading. Whatever your trading style and time horizon may be, you need to make a plan and stick to it.
One of the main reasons that the failure rate in day trading is so high is the fact that traders lose too much money and give up. If you approach trading with grit and try to get better after you make mistakes, you could potentially become successful. Don’t give up after you make a bad decision — learn from it, and use it as a tool to learn how you can avoid making other mistakes in your day trading career.
When you’re first starting out in the trading world, you need to write out a plan for all your trades. Successful traders like Kyle Dennis and Jason Bond still continue to do this even after years of experience. They create plans that work for their needs and goals, and they stick to them.
Your first plan can be simple. Include your thesis (a few sentences), the price range at which you’ll buy, your stop loss, and your take of profits. Knowing your self and your own needs through the creation of a plan can help you avoid making costly day trading mistakes.
For example, Kyle Dennis’ plan is relatively short. He identifies his 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 setups, then looks to see the upcoming biotechnology catalyst dates. After that, 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.
Trading Off Based On Emotions
You ever hear someone say they’re on tilt? You’ve probably heard this in poker, but it applies to trading as well. When you’re on tilt, you’re making decisions based on your emotions. You should never let fear and greed control your trading decisions.
Now, let’s say you’re a long position on a stock and you’ve watched it go up 20% due to positive news. Greed could cause you to think that the stock could run another 20%. However, the chances of it doing so aren’t 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 information arises.
A lot of traders also trade on hope. If a stock they’ve held on to for too long moves against them, they might let it blow right through their stop-loss price, hoping the stock will turn around. Always avoid this mentality. When you have a stop-loss price, respect it.
Trading Without Stop-Losses
Another huge day trading mistake beginner and professionals sometimes make is trading without stop-losses implemented into their plan. We touched on this a little in the making a plan section, but it’s important to expound upon. Stop-loss orders are essential to trading. It helps to maintain discipline while trading and helps stop you from making decisions based on your emotions or being 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. Then, you would set a limit price, which is the price at which you would sell your long or cover your short position.
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 pile on. 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 out. A lot of beginner traders are stubborn and add to their 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 pullbacks 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.
Cutting Your Winners
Another common day trading mistake is cutting winners too early. You need to let your winners ride. 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 taking a long position on 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.
The Bottom Line
When you’re learning how to trade, you need to avoid these costly day trading mistakes. If you’re looking for day trading mistakes to avoid, these are just a few examples. Do your research, talk to your mentors and professionals, and develop your plan to recognize and avoid 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 and place yourself on the road to success.