The advent of day trading in the late 1990s created an opportunity for regular people to make money in stocks and financial trading. With a simple account and a few hours, they could buy and sell directly without sinking money into a broker.

It was also an opportunity for disaster. Successful day trading is not a casual pursuit. And eliminating the middleman means moving forward without the benefit of advice from an expert.

Some people make good money with their day trading efforts. Others lose their investments as quickly as they would in a Vegas casino.

There’s no guarantee to make anybody stay in that first group, but we have identified the six most significant mistakes so you can up your odds of making money as a day trader.

6 Common Day Trader Mistakes

  1. Overtrading
This might be the most common mistake day traders make in the early weeks and months. In their excitement, they buy dozens of stocks all at once, hoping to turn a short-term profit whenever they observe an uptick.

Overtrading can potentially be lucrative, but it represents several serious risks:

  • Trading without the benefit of research, since trading in too many positions leaves little time to understand most purchases fully
  • Excess fees for those with accounts that charge per individual trade
  • Managing too many positions at once, adding complexity beyond a casual trader’s ability to handle

How big a deal is this? According to a 2020 literature review from a team at UC Berkeley published in The Journal of Finance, the difference in annual yields for households that trade frequently is 7.1% lower than that for families that trade infrequently.

These risks are more harmful to the typical day trader, a professional in a different field who trades stocks as something between a hobby and a side hustle. Without the benefit of full-time hours and a professional knowledge base, the resources needed to overcome those risks are lacking.

  1. Panic-Buying Hot Stocks
Momentum trading is a reliable stock strategy brought to the mainstream by Richard Driehaus in the 1980s. It’s the practice of leveraging volatile markets to purchase stock in a temporary upswing, then selling it at or just before its peak.

Although popularized only 40 years ago, the strategy has produced consistently higher returns by 0.5% to 1% over the past 140 years, according to the National Bureau of Economic Research (NBER) data analysis.

Panic-buying hot stocks seems similar to momentum trading but is different in preparation and motivation.
Experienced momentum traders stay apprised of the long-term performance of stocks so they can better predict how an upswing will play out. They’re prepared to maximize profits and minimize risks. Similarly, they’re motivated by working out systems and plans to execute in real time.

Panic-buyers are motivated by fear of missing out. They see a stock on the rise, often later in its cycle, then buy it. This unconsidered action can reduce profit and increase risk.

The NBER paper noted that momentum trading was also subject to occasional significant losses, usually only avoidable by those with a long-term, professional interest in stock cycles despite its overall improved performance.

  1. Timing Issues
Traditional stock investments work on a timeline of weeks, months, or years and are therefore protected from some market volatility. Day trading, which by definition works on a timeline of a day or less, is less protected.

This can lead to several timing mistakes, such as:

  • Holding onto a stock for too long after it peaks in value, losing extra potential earnings with each elapsing minute
  • Selling a stock on the rise too early, only to watch it continue increasing in value after no longer holding a position in that company
  • Selling a stock after it peaks for the day, missing out on its top potential earnings

None of these risks is necessarily a reason not to engage in day trading. But they may be partly responsible for the results of this Brazilian study that showed 97% of persistent day traders lose money over a year, or this UC Irvine review that found day traders on Robinhood received average returns of -4.7%.

  1. Taking Big Positions Early
    Many day traders get excited about an opportunity and place large orders in the four- and five-figure range, confident the tip they got or the company they’re enamored with will come through in the clutch.
    Trading in this way is more akin to placing a sports bet than to responsible investing and carries a similar level of risk.
Experienced traders, including professionals, take on diverse portfolios for this reason. Betting too much on any one stock is a rookie mistake. Stocks that are safe enough to deliver profits are stable enough to make those profits small compared to other options.

A study illustrates the importance of diversified positions. From a list of nine potential investments, diversified portfolios outperformed the others from 2010 to 2017. Diversified portfolios performed best for three years and second-best for another two. No other investment strategy placed in the top two.

  1. Over-Focusing on Day Trading
    Day trading has risks beyond the financial. It combines the addictive elements of both video games and gambling. It can attract too much of your attention if you let it, and studies on habitual day
    trading have noted the similarities between this and gambling addiction.
Trading addiction is not yet recognized officially as a form of addiction. However, studies like this one list out warning signs that somebody has turned day trading into a destructive habit:
  • Persistent thoughts of trading while engaged in other activities
  • Needing to trade with increasing amounts of money
  • Needing to trade for increasing amounts of time
  • Missing sleep to spend time trading
  • Repeated, failed efforts to cut back on trading
  • Trading as a stress response
  • Chasing losses
  • Lying to conceal the extent of trading or losses from trading
  • Relying on others to provide money for trading or to cover losses from trading

  1. Going Too Deep on Technical Indicators
    Many novice day traders operate under the belief that if one or two technical market indicators are good, then 10 or 20 should be even better. Indicators do provide some valuable information, but too many present a pair of problems.

The first is that tracking too many indicators leaves little time for the other tasks involved in day trading. The second is that a myopic focus on multiple indicators can lead you to ignore big-picture performance.

A representative sample of day-trading publications shows that a small set of powerful technical indicators are sufficient for most situations:

  • Investopedia recommends four: Bollinger bands, stochastics, MACD, and on-balance volume
  • The Balance recommends just two: MACD and Relative Strength Index (but also suggests using them in tandem with up to six others)
  • Warrior Trading recommends three: Senkou Span B, Volume Weighted Average Price, and Trading Volume
  • Yahoo Finance recommends four: Moving Averages, Relative Strength Index, Stochastics, and MACD

Final Word
Chances are you’re guilty of at least one of the mistakes above. It’s OK. They’re common mistakes. The important thing is what you do next.

We recommend you take some time to perform a fearless inventory of your day trading behaviors over the next week or so. Identify any mistakes you’re making, then build a to-do list of how you’ll break those habits. You’ll be surprised by how much more profitable your day trading profits become.

Molly Casey is a Midwest-based financial consultant who has day traded on the side.


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