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
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
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.
- Panic-Buying Hot Stocks
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.
- Timing Issues
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
- 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.
A Schwab.com 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.
- 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.
- 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
- 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.
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
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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