While it is impossible to become a master day trader without making, and learning from, mistakes. There are plenty of pitfalls that being aware of will allow you to avoid without stepping into them yourself. Remember, forewarned is forearmed.
Chasing tops and bottoms: Some strategies are effective when put into play near potential turning points. These are in the minority however and picking tops or bottoms is a risky proposition, at best. It is common for many traders to invest extra money into securities that seem either too low or too high, breaking the cardinal rule of a two percent trading limit in the process. This impulse should be avoided at all cost in favor of focusing on the major move that is inbound. Starting to one side of range-bound markets will lead to better overall results practically all of the time.
Not getting while the getting is good: Many day traders have an adequate entry plan but then move forward without determining an exit plan that is just as effective. This, in turn, leads to scenarios where they either get out too early, too late or end up with an investment instead of a trade. If you find it difficult to know when to exit gracefully, you will want to focus on adding detailed technical specifications to your exit strategy. Once you put these specifics into place, it is important to monitor them and change them as needed as the market evolves.
Wasting time trying to get even: If you ever hope to be a master day trader then you need to factor failure into your long-term plan. Not only will this make it easier to prevent emotion from getting the better of you, it will help you make fewer mistakes down the line as well. Remember, it is important to focus exclusively on the numbers and not pin your self-esteem or personal image to individual trades. Focusing on the price action will allow you to block out thoughts about breaking even or magic numbers and improve your trade percentage as a result. Determining if a day was a success or a failure isn’t something you can do until the market closes and it is useless, and destructive, to try.
Following relative trends: Existing trends in the market can be a potential signpost for future movement but they are far from guaranteed. It is completely natural for the market to fluctuate as much as 20 percent on either side of the average at any given time. As such, if you jump on an apparent trend without researching it thoroughly you can find yourself attached to a momentum play that will never materialize. Instead, it is important to consider each apparent trend through the lens of three distinct time frames for the best results. If you are fond of short-term trades then daily, hourly and weekly charts are recommended. If you prefer long-term trades then you will want to stick to weekly, daily, and monthly charts instead.
Unduly narrowing your focus: Every time you make a trade it is important to remember that it doesn’t exist in a vacuum. Not taking this into account will cut into your trading capital with a steady stream of preventable losses. A better solution is to instead take a macro view on all of your current trades. This means keeping tabs on market leads and looking for capital that is likely to move in general derivatives. These derivatives are key as they highlight the underlying connections between markets that ensure they move in the same ways. Remember, the greater your scope the more effective you will be.
Letting strong opinions affect your trading: While everyone has opinions, effective day traders know that letting them influence your daily trades is a recipe for disaster. The only thing you need to rely on in order to trade effectively is math, anything else is just going to get in the way. Observe and analyze political and economic events, don’t get caught up in them.
Having the wrong timing: Finding a potentially profitable trade is only half the battle, you also need to learn when to pull the trigger for the best results. Making the right move at the wrong time costs day traders collectively millions of dollars a day. This is not to say that you need to wait for everything to align perfectly before you make your move. Rather, you are going to want to get a feel for the moment that things are right enough and act accordingly.
To do so you are going to want to be aware of relative trend, understand the current strength of the weekly cycle and keep an eye on accumulation and distribution indicators. Above all else, never move on a hunch or tip without doing the required research as all you are likely to do is throw your commission fees away.
Averaging down: While averaging down is rarely the primary plan, it is easy to let it happen if you aren’t actively planning against it. The resources spent holding a weak position can almost always be better spent elsewhere as every trade costs you time and weak positions are likely to cost you money as well. Keep in mind that every failed trade means that your next successful trade needs to pay out extra just to help you break even for the day and then even more to get ahead. If your starting trade capital isn’t that great, averaging down can represent days, or even weeks, you are going to need to spend crawling back to square one. If you subsist on short-term trades then you need to be ready to exit as soon as forward momentum slows or, at worst, starts to slip backward.
Not accurately calculating risk and reward: Risk and reward are naturally a part of every trade. This doesn’t mean they are always equal, however, and if you don’t take the difference into account you can make the wrong moves without even realizing it. This is why it is important to set daily trading limits as it will help you to bring things into focus. If a given trade is risky enough to warrant possibly losing ten percent of your daily loss limit then you will want to ensure it will pay out at least twice, if not three times as much to balance out the risk. Regardless, making ten smaller trades that are more likely to be successful is almost always going to be a better choice.