Day trading is not a matter of checking off to-do items. It’s a long journey of making mistakes.
You will continue to make the same mistakes for a long time without even realising. If you stay in the game long enough, eventually, you will learn to recognise the mistakes.
But that’s still a long way from getting rid of the mistakes and their impact.
Start trading unprepared and there’s a high chance that these mistakes will destroy you. And that is before you even recognise them as the threats they represent.
This list is not exhaustive. But it will help you pinpoint the most destructive mistakes you can make as a day trader.
Mistake #1: Thinking That Day Trading Is Easy
As a source of income, trading is highly uncertain and extremely challenging. On top of that, it requires a shift in mindset that some might never be able to make.
Trading is not easy. It is not something you do to get rich quick.
Heard someone claiming otherwise? That person is more interested in selling you something than to help you trade well.
If you think that trading is easy, you’re set on a path of disillusions.
Starting with unrealistic expectations is the fastest way to destroy your trading aspirations.
Start by recognising that day trading for a living is tough. Then, if you find yourself looking forward to the challenge, proceed.
Mistake #2: No Written Trading Plan
Writing down a trading plan is a huge task. I understand that. My written trading plan was a top victim of my procrastination.
Not having a written trading plan has huge (bad) implications.
You are biased. I am biased. We all are. And the bias worsens when you are in the market.
A common bias is the hindsight bias. For instance, you get a winning trade by breaking a trading rule. You then conveniently overlook the fact that you’ve broken a trading rule. Then, you can claim credit for the profitable trade.
While that might make you feel good for the day, it will undermine your goal of becoming a consistent trader. Because in the long run, it’s your trading rules, not luck, that ensure your performance.
A written trading plan will help you keep these biases in check. Is it easier to ignore a trading rule printed on paper or one that’s floating in your head?
Even if you are able to avoid these biases, a written trading plan is still essential. You cannot improve what you do not track. Without a record of trading rules and guidelines, how do you find out which rules are working? How do you become a better trader?
Mistake #3: Placing Trading Profits Over Education And Process
Day traders chase after profits. Of course, we want to be profitable. But you must recognise that profits result from your learning and trading process.
For a novice day trader, education is paramount.
You must absorb all trading concepts like a sponge. Then, you need to judge what works for you. Finally, you focus and specialise through practice. The focus is on learning and not earning.
For a struggling day trader, the process is the key.
Work on your trading decision process. Create a trading plan. Research and improve. Build a process to form a sound trading decision. Have a process to review that process.
Profits will flow in once you’ve taken care of your trading education and process.
Mistake #4: Not Understanding The Risk Profile of Your Trading Strategy
Drawdowns are tough. But they are inevitable. Even the most profitable strategy has drawdown periods.
Consecutive losses deplete your trading account. They also wreak havoc on your confidence. Consecutive losses cause you to doubt your trading ability.
Once doubt creeps in, you’ll fall into a vicious cycle of bad trades and overtrading. This cycle will end with the ruin of your trading account.
The root cause of this doubt is ignorance – a lack of knowledge of your trading strategy’s risk profile.
Different trading strategies have different risk profiles. For instance, high-frequency scalping has a high win rate with low trade profits. Hence, a scalper should be concerned even with a short losing streak.
But not all strategies have a high win rate. A trend-following strategy has a lower win rate. A trend follower should be comfortable with a longer losing streak.
Understand your own trading strategy. Guide yourself with numbers and not feelings.
Be prepared. Find out the largest drawdown and consecutive losses of your trading strategy. Running a Monte Carlo simulation based on your trading records is a good way to do so.
With those numbers, you’ll know when to trade through drawdowns. You’ll also know when to pause and review your trading strategy.
Mistake #5: Thinking That A Trader Must Trade
All of man’s misfortune comes from one thing, which is not knowing how to sit quietly in a room.
This is a persistent mistake. And traders can take years to understand this.
Knowing when not to trade is a valuable (and profitable) skill.
This problem is linked to the traditional work ethic that’s instilled in most people. The more you work, the more you earn. While that might be true in most professions, it does not work for a day trader.
Yes, you must trade. But you should trade only when you find an edge that allows you to make money.
In most cases, a trading edge is fleeting. Hence, if you find yourself trading constantly, it’s likely that you are just gambling.
Mistake #6: Failure To Limit Your Risk
A day trader should be obsessed with risk management.
Before you are profitable, your goal is to stay in the trading arena for as long as you can. To gain trading experience, you must be able to trade.
If your trading account is busted, you can no longer trade. Not to mention becoming a profitable day trader.
Even after becoming profitable, limiting your risk is the key to a long day trading career.
Position sizing is one of the most important risk management aspects. Do not trade larger than you can afford. And before you are sure of your trading edge, there is no reason to trade more than the smallest size.
Position sizing is not enough. It must work hand in hand with limiting your trade risk (i.e. the amount you risk losing in a trade). A stop-loss order is what you need.
Don’t make the mistake of exposing yourself to the risk of ruining your trading account. Respect your trading capital and protect it from harm.
Mistake #7: Forgetting Psychological Risk
Most traders understand financial risk. But there is a more insidious risk: psychological risk.
What is a psychological risk?
Trading causes emotions to flare up. These emotions might cause you to ignore your trading plan and impair your judgement. The risk of that happening is a psychological risk.
There are many examples of how psychological risk might destroy you. Here are some of the common ones.
Multiple winning trades cause hubris. You become overconfident. As you think that you cannot lose, you ignore your position sizing rule and trade larger than you should.
Consecutive losses lead to revenge trading. You over trade in an attempt to earn back earlier losses. Doubling down and impaired judgement is common as revenge trading takes place.
Do you talk to your friends about your trading position? Doing so might cause you to feel attached to your trading position. Then, its outcome becomes a matter of ego to you. As a result, you refuse to take a small loss according to your trading plan.
In each of these examples, the fault lies squarely on the trader. If you cannot respond to your emotions correctly, you are your greatest enemy.
Most new traders blame the market, strategy, and brokers for the bad things that happen. As long as you are doing that, you are blind to psychological risks. You remain susceptible to their harmful effects.
Hence, the first step to managing psychological risk is to recognise them.
Once you are aware of these risks, you can find the situations and emotions that get you into trouble. Only then, you can design rules to avoid them.
Mistake #8: Listening To Your Friend Or What The Forum Says
Do you get influenced by what people around you think? Are you objective and independent?
You might think that you are. But we always overestimate ourselves. Inevitably, we think we are more rational than we are.
This is why the best day traders isolate themselves from the chatter of other traders. Especially when they are making critical trading decisions.
When you are not trading, it is fine to bounce trading ideas with your friends. Keep an open but critical mind. There are many benefits to absorbing new ideas. However, when you are making critical trading decisions, it is best to steer clear of the noise out there.
Day trading requires focus and a clear tether to your trading instinct. Don’t risk distractions by listening to the others.
Mistake #9: Not Getting Your Trading Basics Right
Trading forex? Can you explain what is a currency pair? Can you detail the workings of your forex broker? Do you know why the forex market moves?
Trading futures? What does a futures contract represent? Do you know what is maintenance margin? Do you know how are margin requirements set? What is open interest?
These are basic trading knowledge. Don’t start trading without getting your basics right.
You don’t need to spend a single dime to pick up these knowledge.
Conclusion – Fix These Day Trading Mistakes Before It’s Too Late
Fixing these mistakes might not turn you into a profitable trader. But if you continue to make these mistakes, you are impeding your trading progress.
Work on them slowly, one at a time. Once you get them out of the way, you will find that you are much closer to trading consistently.