Avoid Day Trading Mistakes

Day trading for beginners is like taming a lion, except more expensive. It's a risky and challenging pursuit: buying stocks and selling them again in the same day, making money off tiny fluctuations in the price of a stock over a six-hour period. For many years the tools of day trading were not available to the average investor. Today with high-speed Internet connections and a lot of nerve, anybody can day trade. If you have a stout heart, here's what you can do to avoid common and costly mistakes.

Steps

Preparing to Day Trade

  1. Develop a business plan. Day trading is a business endeavor just like any other income-producing endeavor. As a result, you should develop a business plan that includes the following:
    • A list of the equipment you will need to become a successful day trader. At a minimum, you'll need a fast computer and an Internet connection. You might want to invest in a backup computer just in case there's a problem with your main computer.
    • A list of the training courses you'll take to receive the proper education about day trading. You'll probably want to start with some courses about how to predict trends in stock prices (that's called technical analysis). You might also want to take some courses specific to day trading strategies and how to be manage your money while trading.
    • A projection of minimum profitability over the short- and long-term.
    • A budget that includes expenses associated with day trading.
  2. Create a trading plan. There are many trading philosophies and strategies for making a few quick bucks in the stock market.[1] Decide which strategy works best for you and stick with it once you start day trading.
    • Identify your performance metrics. How will you determine whether or not you're trading successfully?
    • Define your trading edge. What kind of signals will you look for that indicate an opportunity to initiate a trade?
    • Identify the types of stocks you want to trade. Are you looking for stocks under a specific price target? Are you looking for tiny movements in heavily traded stocks?
    • Define your exit strategy. How will you know when it's time to close out a position?
  3. Anticipate losses. Nobody has a perfect batting average in day trading. You're going to take losses sometimes. That's just part of the equation.
  4. Expect the unexpected. Playing the stock market is a contact sport. Be ready for wild swings, unforeseen dips, inexplicable turnarounds in a stock price and basically anything else.
  5. Practice trading. As with everything else, you should practice day trading before you do it for real. Fortunately, that's easy thanks to modern technology. You can set up a pretend trading account and trade stocks with absolutely no financial risk. TD Ameritrade offers a trading platform called "Think or Swim" that allows you to trade without using real money.[2]

Trading to Win

  1. Stick to your trading strategy. It's easy to get caught up in emotions and a fear of loss when you start day trading and quickly succumb to impulse selling when it appears that a stock isn't moving in your direction. Recall that you've put a great deal of effort into crafting a trading strategy that has a demonstrated history of success. Stick to that strategy and leave your emotions out of the process.[3]
  2. Avoid changing your strategy because it seems to "not be working any more." Even the best strategies experience a string of losses. Change your strategy based on fluctuations in market dynamics (for example, a change in market volatility) and not simply because you're losing money.
  3. Stay on top of the news. It's important that you regularly consume financial news reports so that you understand what could move the markets on a day-to-day basis.
    • You'll often find financial news related to stocks embedded in your trading platform.
    • You can also visit numerous websites, like CNBC.com, TheStreet.com, and MotleyFool.com for other news.
  4. Perform post-trade analysis. After the trading day is over, look back on your trades and determine what happened with each of them. Why were the successful trades profitable? Did you take losses because you didn't follow your strategy properly?
  5. Keep a trading journal. A trading journal is an excellent way to monitor your historical successes and failures. Fortunately, you can get software that makes it easy to keep a trading journal.
  6. Adapt to changing markets. Understand this up front: You will never fully figure out the stock market. It's a constantly evolving organism, ever-changing and never fully settling. Although you should never change your strategy just because you're losing money, it's important that you adapt your trading style to the market as it changes.
    • Remember, your alter your strategy based on underlying changes in the markets, not because of emotion or fear of loss.
    • If market volatility increases, that's a good reason to adapt your strategy to new market forces. However, if you change your strategy just because you took an unexpected loss, that's a bad reason to change your trading philosophy.
  7. Remember that "hope" is not a trading strategy. You might notice that a trade you placed isn't going your way, so you hope that it will turn around. Keep in mind that "hope" isn't a sound trading strategy. Instead, apply your trading philosophy to the losing position and make the appropriate call.

Placing Orders the Smart Way

  1. Use a stop-loss with every order. A stop-loss order exits you out of the position once you've lost a certain amount of money. It's a way to avoid taking a steep loss on a bad trade.[4]
  2. Use limit orders. With limit orders, you're saying that you're unwilling to pay more than a specific price for a stock.[5] It's always best to use limit orders because the market price can swing wildly in just a few minutes.
  3. Avoid "chasing" stocks. You might think that you've stumbled across a great stock that can earn you a lot of money, so you starting bidding on it. After a little while, you find that your order isn't filled because the price went up. So, you increase your bid. That's called "chasing" the stock and should generally be avoided. Remember, the name of the game is to buy stocks at the right price, not chase them around just to get an order filled.



Tips

  • A simple Google search will reveal countless free learning courses on successful day trading that will include an overview of technical analysis and various trading strategies.
  • You won't be able to keep track of everything on your own. Join an online group of day traders to get ideas from other people.

Warnings

  • Due to short time lines that prevent any company research or other traditional stock analysis tools, day trading is often regarded more like gambling than a business.
  • Day trading is the most risky and volatile investment trading strategy.
  • According to some professional money managers, well over 95% of day traders lose money.

Related Articles

Sources and Citations

  1. ↑ http://tradingsim.com/blog/trading-plan/
  2. ↑ https://www.thinkorswim.com/t/innovation.html
  3. ↑ http://www.tradingmarkets.com/recent/9_tips_to_trading_without_emotion_part_1-675980.html
  4. ↑ http://www.investopedia.com/terms/s/stop-lossorder.asp
  5. ↑ http://www.investopedia.com/terms/l/limitorder.asp

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