When working as a day trader, costly mistakes are going to be inevitable. Especially when you are first learning. These setbacks can damper your morale, your trading account balance, and even your pride. But, never focus too negatively on them, because often times they can provide valuable lessons that will benefit you going forward. I've realized through teaching that human beings have to learn certain things the hard way despite how may times they are told. Regardless of how often I tell students not to over leverage their trades for example, they still seem to do it. The fact is pain is one of the best teachers you can have and it should not always be considered a negative. You tend to learn a lot more when something hurts. When you have a big trading loss it always ingrains itself in your head and you will most likely never forget it. Face the pain, learn the lesson, and then don't make the same mistake twice. Below is my list of 25 fatal day trading mistakes to avoid...
1. Not having faith in yourself. You simply will not be largely successful at anything without having faith in yourself and your ability to make things happen. Many people fail right at the jump by never starting or finishing something because of lack of believe that they can even truly do it. You can't just have the attitude of hoping things will workout for you. You have to make them workout for you by being relentless. You need to adopt the attitude of "No Plan B!" Failure is simply not an option and you have to do whatever it takes.
2. Not studying enough before starting. Too many traders jump into day trading with real cash without really being prepared. Be sure you are constantly educating yourself by reading books, watching Youtube videos, scanning internet articles and have some solid knowledge before you start making live trades. You wouldn't perform open heart surgery without being prepared would you?
3. Not learning from a successful trader. Many traders make the mistake of learning from someone who is not even trading successfully themselves or yielding profit on a regular basis. If you learn the wrong way starting out, your foundation is going to be broken. You will eventually have to unlearn everything and rebuild from the bottom up just like a house. This can end up costing you a lot of time and headache.
4. Giving up too easily. Persistence is one of the most common traits that millionaires possess and yet it is something of a rarity. I run into people all of the time who are ready to quit the second things don't go their way. Pushing through when times are tough such as dealing with big trading losses is absolutely paramount. I cannot stress this enough. I ask my students all of the time..."When is it alright to quit?" The answer should be "never." Try it out and see what happens for you.
5. Not keeping losses small. Every trader should have a loss threshold % set in their mind. An amount where they determine they will exit a trade and not let the trade go any worse against them. Losses always hurt, but as long as you don't let things get out of hand, you will come back and live to fight another day.
6. Chasing stocks too high. Too many traders get sucked into the herd behavior and end up chasing a stock when it's at the top, just to get crushed when the selling begins. Ride the trends, but don't be what I call a prawn. This is someone who chases the top and bottom feeds on stocks at the bottom that have no hope of recovering.
7. Over leveraging positions. Do not take position sizes that are far too big for your account. Going in single trades with say 50-100% of your cash or more is simply not a good idea. Especially if you are just starting out. I understand the thought is that you want to make the max possible on the trade by utilizing max leverage, but you can also lose the max possible if you are wrong. And let me save you the suspense...You are going to be wrong plenty. Try taking trades with 5%-10% of your account and refrain from borrowing money from brokers. Another important reason to avoid over leveraging is it can eat up your buying power and cause you to miss out on other potentially profitable trades (opportunity cost).
8. Over trading out of boredom. When the market is slow or volume is weak its easy to get into a trade that was forced out of boredom. You are much better off to just stay away and sit on the sidelines than to risk taking a loss that can set you back a day. Remember that the first rule of Trade Club is "Don't lose your money" and the second rule of Trade Club is "Don't lose your money!"
9. Failing to control emotions. Emotional control is not easy as we are all emotional beings. But your emotions can tear you up when trading if you let them. Sometimes your rationale will go out the window and fear will take its place. I personally find that exercise such as playing sports, lifting weights, running sprints, jogging, or yoga can be a difference maker. Moreover, it is a good idea to pay attention to what you consume. Caffeine for example can increase anxiety. Trading is a stressful job and that angst has to get released on something other than throwing your monitor or keyboard!
10. Not taking profits due to greed. I like to say that being a little greedy is a good thing. But being too greedy with your trading will have negative repercussions for sure. Greed drives us all, but be sure you are locking that green when the profit is there or it could be short lived.
11. Not learning from past mistakes. Some people will make a mistake and then continue to make the same mistake over and over. You have to learn from the mistakes you've made in the past and make the necessary adjustments to improve and grow your trading skills. Just like anything else in life, you get better by doing something. As the saying goes..."Practice makes perfect."
12. Not setting limit orders. If you set market orders you are basically at the mercy of the market maker to fill you order where they please. A limit order makes sure you get filled at the price you are wanting. Sometimes, if you need a quick and immediate fill a market order can be of benefit to you. An example would be if you are long and very negative news drops suddenly. You would be in need of a quick exit before the selling takes over.
13. Misunderstanding margin rules. Be sure that you are well aware of all margin requirements and SEC regulations so you can avoid forced buy-ins from brokers, margin or day trade calls, and trading restrictions.
14. Listening to talking heads. Most (not all) talking heads on television or social media are just out to entertain you or further their own agendas. I find that most of the talk is absolutely worthless and will in no way help your trading. The biggest value I find is simply being informed about world and economic news that will be relevant to the market behavior.
15. Trading without real-time software. You need real-time software in order to day trade stocks successfully. Yes the software can appear like Greek at first, but once you learn and get comfortable, you will find you cannot trade without it. The speed at which you can take entries and exits, the access to level 2, charting, and streaming news is a must. A good example would be two of the ones I use Das Trader Pro and Fidelity's Active Trader Pro.
16. Revenge trading. When you've had a tough time trading a particular stock and you attempt to continue trading it, this can be considered a revenge trade. I've found that most of the time you attempt this you just end up losing more money. If its just not working with a particular stock, simply get rid of it and add it to the no trade list.
17. Not understanding news release verbiage. Press releases are often times deliberately made out to be confusing and deceiving. Ever notice how important information happens to get buried deep into a sea of gibberish? This is because the companies always have a motivation to get their stock higher and they know many traders will jump all over it without even reading thoroughly. So, don't be surprised when they take advantage. Recycled pr's and misprints are common place. The new thing is fake landing pages made out to look like legit websites. The internet has given these frauds an ability to get attention.
18. Not understanding financial statements. Financial statements can be very confusing. Be sure you understand how to read balance sheets, income statements, 10q's and 10k's (earnings), form 4's, form SC 13 G/A's, etc. Fortunately with day trading company fundamentals are less important than technicals. When assessing earnings, I look at important basics such as whether revenues, profits (EPS), and expenses increased or decreased year-over-year. I also assess how badly a company needs cash. This can make a public offering of shares more likely, which can decrease stock value and dilute investors. Hence the short play!
19. Playing sideways moving stocks. When a stock is running sideways its tough to gauge whether it will pop higher or go lower. It's basically rolling the dice or playing a craps shoot. If you like to gamble, go to Vegas. You want to utilize calculated and intelligent risk. If a stock is holding support strong and has solid news, it is likely to get higher. If the news is weak and its having a tough time with resistance, it will probably get lower. Be patient and wait for the right setups to take entry. You are looking for volatility pops to short and dips to pick up long.
20. Trading with rent and food money. If you are trading with money you really cannot afford to lose then it's going to be more emotional for you and will likely cloud your decision making. Whether you win or lose becomes too emotional for you and mistakes will get made. Growing a small account is tough and you do have to start somewhere, so work on saving money to add to the trading account wherever possible...tax returns, side jobs, etc. Instead of buying that fancy watch or expensive dinner, stick that money into the account and order take out. This is called Delayed Gratification and it will help to get you ahead.
21. Not being aware of the Law of Attraction. The most highly successful people are all aware of the Law of Attraction. Thoughts are energy and whatever dominates your thinking tends to eventually convert itself into reality. Making bad trades? Maybe you are part of the cause via a negative thought process that is affecting your actions. Read up on and Youtube people such as Napoleon Hill, Norman Vincent Peale, Les Brown, Tony Robbins, Ray Lewis, Oprah Winfrey, Steve Jobs, Andrew Carnegie, Jim Carey, Will Smith and many more who talk openly about it. Whatever the mind can conceive and believe, it can achieve.
22. Having a negative mindset. A negative mindset will attract negative things in to your life. It's just as simple as that. Pay close attention to your thoughts and the words coming out of your mouth. What are they saying? This can give you a great glimpse into what thought energy you or anyone else is putting out into the universe. Nature will give you what you want if you force it to through strong positive thought vision and then followed by action. Wake up thinking "today I am going to kill it!" Believe it wholeheartedly and then go do it!
23. Trading too many stocks at once. Laser focus! Some people like to trade multiple stocks at one time, but in my opinion it's too hard to keep track. Find yourself one or two stocks that have nice volatility and trade them in and out all day. Diversification is great for investing because you don't have to worry about the daily volatility of the market as you are holding the stock for the long term. But, for day trading it's much too distracting to have to worry about the daily movements of so many different stocks. It's just too much to manage, so keep it simple!
24. Not utilizing stops. Stop losses will protect you from the fluke situation and from a stock going too far against you. Either a mental or physical stop can be utilized. I use more mental, but what you choose depends on what you feel is best for you. Be sure you set them about ten cents above resistance areas in case of a breakout when short and about ten cents below support in case there is a crack when you are long. Stops will get targeted when too close to these areas. They are a great way for market makers to get cheaper shares.
25. Failing to take responsibility for your mistakes. There is something called an "externalist" and an "internalist." An externalist blames all outside factors for their mistakes and things that go wrong. An internalist (which is what most successful people are) knows that they alone are responsible for their actions, decisions, and mistakes. Take responsibility for your bad trades and learn from them. Nobody forces you to pull the trigger on any trade idea as it's your decision alone. Everyone (including top pros) is going to make mistakes and have losing trades at times. The key is learning from these mistakes, being resilient, and consistently improving your game. Trading success is sure to follow!