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 belief 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!
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Day trading can be a very tough and emotionally draining job. Beginners are misled to believe that it somehow is going to be a cakewalk. This is simply not the case. Day trading is one of the toughest jobs that exists and humbles many very intelligent people on a regular basis. There are people all over the internet talking about how you can become a millionaire within a year or even overnight and its complete baloney. I'm here to give everyone the real and not to mislead you into false thinking. If anyone thinks being successful in this field is not going to require serious hard work and hustle then you will quickly be educated. Day trading is very similar to operating a small business and things are not always going to go your way. In fact, its the only job we are aware of where you can actually lose a paycheck. However, day trading can also be a highly rewarding pursuit. With proper discipline, patience, persistence, and resilience, you can achieve financial freedom, work for yourself from anywhere, and you can make a lot of money doing it. Below are 20 crucial day trading tips we've learned from experience...
1. Trade small when you are first learning. A new trader with a large account is a potential disaster waiting to happen. When you are trading with big money and don't know what you are doing, big losses are inevitable. Get practice and build confidence by trading with small amounts of money until you become more seasoned. Paper trading is not the same as trading with real cash because the true emotion is removed from the equation. Get a broker who is not going to destroy you with fees and wipe out a small account slowly. Something like Fidelity or Interactive Brokers is a good place to start. Certain lessons you will have to learn the hard way and you want the cost of tuition to be as cheap as possible.
2. Open two separate brokerage accounts. When you start out trading under $25,000 you will not be designated as a Pattern Day Trader (PDT). Instead of being able to make unlimited day trades you will be limited to three day trades in a five day rolling period. If you open two separate brokerage accounts you can get six day trades in a five day rolling period (3 from each broker). These rules can be a real pain, but this is not necessarily a bad thing. It can actually force you to be smarter and more careful about the shots that you do take. More trades does not necessarily equate to more money. It can also end up causing you more losses.
3. Trade like a sniper and wait for the right opportunity. Pick your shots carefully and be patient with your entries. With a limited number of day trades you don't want to waste them. The key is to focus on quality over quantity. Once you are designated PDT this won't be quite as important. Look more for swing plays because holding overnight will not count as a day trade. Look for strong news that can move a stock for a few days and ride the momentum.
4. Don't waste a lot of time on research. Research is for investing and day trading is an entirely different animal. You are trading on charts, price action, volume, and support/resistance, where as with investing you are betting on companies you believe will grow in the future. If you are investing in a company like Amazon for the long term then by all means dig in. With day trading, be more concerned with shorter term news catalysts. I will at times do a quick earnings check to get an overall view of the companies financial position.
5. Keep things cheap and simple to start. When you first start trading and have a small account, the last thing you need is to be paying for software that eats it up. I do not pay for any software. I use the software that comes free with my brokerage accounts. Keep it simple and as cheap as possible.
6. Keep living expenses minimal. Far too many people have over priced cars or homes and are spending way too much money to try and impress others. Instead keep the expenses low and live cheaply. Stick that money into your account instead and use it to grow. In my opinion, money is best used to make you more money. I would much rather have cash stacked in my account to do whatever I want, than to show off material baloney that really doesn't matter in the end. Later when you are printing dollars you can buy whatever you want. I personally recommend you use it more for life experiences such as travel.
7. Be sure you are using the proper trading software. Trading with the Robinhood app or via your brokers website is the same as playing baseball without a bat. You cannot see level 2, timing is delayed 15 minutes, and you just simply don't have the proper tools overall. Be sure you are utilizing real-time software such as Das Trader Pro, Fidelity Active Trader Pro, or TD's Think or Swim.
8. Investing is not going to get you very far. Making 10% a year return on a $10,000 account is not going to get you to full-time trader status. Trading large cap stocks won't help much either as the % gain potential is much smaller than with that of small cap stocks (unless you are playing with options). The OTC market is comprised of mostly scams and therefore I do not recommend messing with it. Small cap stocks on the Nasdaq and NYSE Mkt are what I find to be the bread and butter. They actually move with enough volatility to get someone ahead with a smaller sized account but are still legit companies for the most part. Watch out for Chinese stocks and shipping.
9. Do not over leverage your trades. When you trade too heavy you risk the possibility of margin calls and forced buy-ins from your broker. A beginner should never be in any single trade with more than 10% of their total cash (not total buying power.) A beginning trader should never borrow on margin from their broker. If you are wrong it will just accelerate your loss and could put you temporarily out of business.
10. Have a set loss % threshold. Controlling emotions is something that must be worked on and you will get better at it over time. In my opinion all humans are born naturally greedy and emotional (some more than others). Everyone's risk tolerance is different, but for me I start to get uneasy when my unrealized loss starts to exceed the $5,000 range. This of course is all relative to your specific situation and account size. Sometimes patience pays off and that unrealized loss can turn into a gain. However, when you cut losses before they get out of hand, at least you know you can live to fight another day.
11. Focus more on solid entries and exits. Try not to focus too much one how much money you are up or down, but on getting solid entries and exits. Practice and learn how to get wins. If these are on point, the money will be there eventually.
12. Be a consistent winner. I like to use the analogy of trading like Ted Williams and not like Babe Ruth. Williams was a very consistent batter and that is what you want when day trading for a living. Babe Ruth hit a lot of home runs but he also would strike out just as often. A big strike out when trading can not only mean the game is over, but the season as well.
13. Be sure to lock that green. This is probably one of the most important mistakes I see new traders make. They are profitable on a trade, but they decide to get greedy and proceed to give back every bit of their gain. Remember Gordon Gekko's quote from the movie Wall Street..."Bulls make money, bears make money, pigs get slaughtered." This is a very true statement!
14. Work off of support and resistance. You will find that in day trading this is your bread and butter. The meat of your gains will be knowing how to play in between the established floor and ceiling. Where is the stock holding support and where is it showing resistance? Short resistance areas and buy to cover at support. Buy long at support areas and sell into strength at resistance.
15. Set physical or mental stops. I personally prefer to use mental stops. I find that they work best for me. But, everyone is different. Stops protect you from the bad situations. For example, a random public offering of shares when long or very positive news when short. Keep in mind that sometimes the stop will not get triggered on very fast drops due to lack of buying. Also, you will want to keep the stop at least ten cents above resistance when shorting and below support when going long. Algorithms, market makers, and big fish love to trigger them.
16. Set price targets. Price targets are great, but there is no guarantee they will be hit. Be sure to know when its time to be patient and when its time to cut the loss.
17. Don't chase stocks long that are ridiculously high. Depending on the situation it usually best to be patient on big movers and not hit them right before the correction. Wait for the dip to support and get the stock at a cheaper price. Then let it ride.
18. Start out working full-time. A common question I get is "how do I become a full-time trader?" My answer is to start out working a full-time job to pay your living expenses and trade part-time, then graduate to trading full-time and working part-time, and then finally to trading full-time and dropping the job completely. You have to have enough capital to make money and also pay expenses to do this for a living. Make it a gradual process with that end goal in mind.
19. Be persistent and resilient. These are the most important aspects of day trading in my opinion. There are going to be tough losses at times and too many people quit the second things go wrong. Go ahead and assume you will take beatings at some point. Being successful in any endeavor requires beating back adversity and continue the journey no matter what.
20. Stay disciplined and stick to your rules. There is a reason for setting trading rules and they only work if you stick to them 100% of the time. It only takes disobeying them one time to pay a painful price. It's not easy as we are all emotional beings, but you want to trade as much like a machine as possible. Think Ex Machina or The Terminator. Day trading is like a business and you have to handle every decision with detail and care.