Top 8 Mistakes New Day Traders Make
Forex Blog Articles
Why do most day traders fail?
Day trading is the practice of buying and selling financial assets over very short time periods, ranging from seconds to hours or days. Short-term trading can produce outsized gains but it can also be a one-way ticket to the poorhouse. New day traders often make the same mistakes. Knowing and learning how to avoid them can make the difference between a lifetime of lucrative day trading and a lifetime of regret.
1. Picking a Bad Broker
Not all brokers are alike. Some charge higher fees than others. Some have better customer support. Most importantly, some are regulated and some are not. Do not risk your capital by using an unregulated broker.
Some brokers will try to push their “preferred” products on you, while others impose trading minimums or only let you trade in certain markets or place certain types of orders.
Find a broker that offers the markets you’re interested in, whether that’s precious metals and hard commodities, cryptocurrencies, or derivatives on futures.
If you’re a self-directed person who wants to learn online, find a broker with quality educational videos and articles.
Be sure to choose a broker that provides one-on-one support 24/7: you don’t want to get locked into a bad trade because your internet goes down in a thunderstorm for example.
2. Making Too Many Trades
There are two types of overtrading: trading too many assets at once and issuing too many buy and sell orders on a single asset. The problem with trading too many assets is that each one multiplies the amount of information you have to track, analyze, and account for.
By keeping your holdings to a strict minimum, you can be sure each one gets a sufficient amount of your attention to be a successful trade.
3. Overconfidence on One Trade
A successful day trader understands the importance of managing risk. You never want to put too much of your portfolio at risk in the same trade. If it goes against you, the losses could threaten your entire trading system.
To avoid this nightmare scenario, always calculate how much of your portfolio you want to put at risk in any single trade before you make it. A general rule of thumb for many day traders is to only risk 1% to 3% of your total portfolio on any single trade. That way, if the trade goes sour, you will easily survive to continue trading.
4. Sunk Cost Fallacy
The sunk cost fallacy is the tendency to stick with a losing decision based on the reasoning that you’ve already invested so much time, energy, or resources (e.g., money). As it applies to day trading, this could be rephrased as: “Putting good money after bad.”
In another version of this fallacy, a trader may keep a position open too long in hopes of it turning around rather than taking the losses and applying the recouped funds to a more favorable trade.
Day traders often use technical indicators to determine entry and exit points on a trade. New traders just familiarizing themselves with continuation and reversal patterns, however, may be too quick to call a signal and enter or exit the trade before the pattern is confirmed.
When swing-trading based on technical signals, no pattern is confirmed until it breaks resistance or support. And even then, no pattern is 100% accurate all the time. That’s why stop orders, targets, and, above all, discipline are so essential in day trading.
Once identifying a pattern, signal, or strategy and acting upon it, new traders often become wedded to it. The market is a constantly evolving, self-adjusting system, however. Traders need to be responsible and aware of new insights and input.
Never become so attached to a pattern, signal, or strategy that you’re unwilling to adjust course when relevant new information comes up. Always be flexible with every trading decision you make, because the reasons you made the decision in one moment may no longer be valid in the next.
7. Buying With No Volume
Volume is the degree of buying and selling activity for an asset, or, in other words, the amount of trading at any given moment. Without sufficient volume, it can be difficult to buy an asset at your bidding price or sell it at your asking price.
You might be right about the timing of a buy or sell, but if you can’t make the trade, you will miss out. Avoid this potential disaster by only trading assets with sufficient volume.
8. Giving in to FOMO
FOMO stands for “Fear Of Missing Out” and it’s what leads traders to buy high and sell low, the death knell of trading.
If you see an asset that interests you, give it the same analysis you would any other potential purchase. Study it. Look for the trend and find your target entry and exit points. Then, as always, stick to those rules diligently.
Day Traders Mistakes Conclusion
As with most things in life, trading can be done well or poorly. Most don’t succeed. But realize that many beginning traders have unrealistic expectations: they expect magical results for little work.
Commit to improving your knowledge and skills gradually and regularly and you will likely surprise yourself.
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