3 Common Day Trading Mistakes You Should Never Make

by Susan Paige on December 13, 2018 · 0 comments

Day traders buy and sell stocks more often and hold them for much shorter amounts of time than traditional investors. Frequent trading combined with short holding periods can result in a complete loss of capital if certain mistakes are made.

While nothing is guaranteed when it comes to day trading, taking the time to learn about the pitfalls associated with it can increase your odds of making money.

Trading Without a Stop Loss

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A stop-loss is an order instituted by a trader that instructs a broker to sell a stock if it drops below a certain price. Having a stop-loss in place guarantees that you’re able to exit a losing trade, and virtually all successful day traders use them.

Stop-losses control your risk. It’s important to place a stop-loss when you place your trade order so that it’s active the entire time you own the stock. Stop-losses only activate when a trade doesn’t go as planned, so they won’t prevent you from making money on a trade.

Lack of Risk Management

Trading without a risk management plan presents day traders with unnecessary risk. To establish a risk management strategy, start by determining how much of your capital you’re willing to venture.

On average, most day traders should risk about one percent of their capital on a single trade. This means that if your account is worth $10,000, you should only risk $100 per trade. While it’s not fool-proof, this strategy can help prevent big losses.

In addition, know when to call it quits. Losses are inevitable, and it’s tempting to try to make up for them by continuing to place trades. Without a plan, it’s easy to lose an entire month’s worth of gains in a few hours. To avoid this, stop trading when you lose a predetermined amount of money. For example, if you account is worth $20,000, you may want to stop when you lose three percent, or $600, of your account balance in one day.

Trading Without a Plan

To realize success, you must formulate a strategy; trading without a well-defined plan is a huge mistake. Know your entry and exit points, the amount of capital you’re going to invest, and the maximum amount of loss you’re willing to sacrifice before you place a trade.

Sticking with your plan is equally important. It’s easy, especially when you’re new to day trading, to abandon a well-constructed strategy because you get nervous or excited. However, letting your emotions overwhelm your plan is never a good idea.

Never abandon your plan in the middle of a trade that isn’t going your way. You can always reevaluate your plan after a trade, and you should make modifications as you gain experience, but wait until the appropriate time to make changes.

Learning about the common mistakes new day traders make can help you grow your capital rather than lose it. Failing to use stop-losses, abandoning their plans, and forgoing their risk management strategies are frequent errors beginning traders make. While these aspects of trading take time to understand, educating yourself about them before you start trading will increase your odds of success.

 

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