Fortunes are made and lost through stock trading. A day trader is particularly susceptible to making and/or losing money on a consistent basis. Avoiding the three most common mistakes made by new day traders can minimize the typical high risk to improve the odds of winning.
Day Trading Is, By Definition, Risky
All day trading definitions are similar. A day trader buys and sells securities throughout the trading day and closes all activities by the end of the daily period. The opposite of a buy and hold strategy, this action plan involves taking wins and losses daily.
Look at the many daily highs, lows, and overall volatility of online stock trading. Clearly, the risk/reward quotient is always high on both sides of the equation. Daily online trading can generate large profit and devastating losses.
A day trading strategy requires that the investor minimize risk and avoid common mistakes. The vagaries of the stock market will generate its own results without negative assistance from the trader.
Common Trading Mistake Number One – Emotional Investing
This mistake is made many times per day by all investors, regardless of their strategy for stock trades. It must be avoided at all costs. The only way to successfully invest is to practice objectivity. Trading stocks on a subjective basis (greed, fear, whim, misinformation, etc.) usually leads to losses.
Day trading, because of the sheer volume of their trades, greatly increases the already formidable risk factor. Daily stock trading demands complete objectivity to have the possibility of success. An investor using options trading or other more complex strategies should be even more diligent to avoid this mistake, as the probability of loss further increases.
Common Trading Mistake Number Two– Investing Money One Can’t Afford to Lose
Using the rent or mortgage money to fund daily stock trading activities will, over time, result in frequent losses. All studies show that people invest differently, often poorly, when they absolutely, positively must win.
Objectivity is lost. Normally solid buy/sell/hold decisions are made with only maximum profit as a goal, often with disregard for risk. Online trading in this situation, made from a position of fear, multiplies the potential for poor stock trades.
Set up a fund with money to use for trading securities and building a portfolio. Be prepared to lose all of these dollars (just as preparing for uses of profit) without a lifestyle change. Buy/sell investing decisions will improve and odds of winning improve.
Common Trading Mistake Number Three – Daily Stock Trading Without Doing Enough Research
A day trader has responsibility to spend equal time on research as a buy and hold investor. The problem is “time.” A buy and hold investor makes relatively few trades and, even as a hobby, has more time to do the necessary research, read stock charts, examine expert newsletters, and find other useful information about prospective trades.
Daily stock trading requires up-to-the-minute data to improve the odds of making money. Trading stocks multiple times per day and not performing the required research is a recipe for disaster. Luck and the competition of other traders who have done the research can generate high losses.
Do the research, or depend on a trusted expert who has done it, to make profitable stock trades. Making this common day trading mistake can take an investor out of the market quickly.
Avoiding Common Day Trading Mistakes Is Crucial to a Strong Portfolio
The stock market can be a wonderful highway to building wealth. It can also be a dead end for many. Avoiding common stock trading mistakes improves the odds of success and minimizes risk. Simply eliminating these common errors, all within the investor’s control, increases the probability of making the best buy/sell/hold decisions. Over time, online stock trading objectively, using pure investment funds, and after doing research, should create a strong portfolio.