To The Moon

Day trading is often viewed as a challenging and risky activity, and it is. This type of market speculation is not only about making calculated trades or booking profits, but it’s also about managing risk and knowing when or when not to jump into a trade.

All this information provide traders with more insights about common pitfalls so that they may steer clear of them going forward. Let’s continue with the next 5 common mistakes to avoid as a successful day trader.

Trading is not gambling!

6. Risking More Than You Can Afford To Lose

In the stock market, some people are drawn to the idea of earning a life-changing fortune by being at the right place at the right time.

Consequently, they go all-in on stocks, risking more money than they can afford to lose.

Doing this could blow up your trading account, leaving you to either close the account or add funds.

How much capital a day trader risks depends on the size of their account. As a general rule, you shouldn’t risk more than 1-2% of your account on a single trade.

7. Not Understanding The Risk-To-Reward Ratio

The risk-to-reward ratio is something every trader should take into consideration, as it helps them decide whether the end profit is worth the possible risk of losing capital.

For instance, if the initial position was $500, and the potential profit was $1000, the risk-reward ratio is 1:2.

Typically, experienced traders tend to be more open to risk and have suitable trading strategies in place. Beginner traders may not have as much of an appetite for risk and could well want to steer clear of markets that can be highly volatile.

Avoid over trading and revenge trading

8. Letting Emotions Impair Decision Making

Emotional trading is not smart trading. Emotions, such as excitement after a good day or despair after a bad day, could cloud decision-making and lead traders to deviate from their plan. After suffering a loss, or not achieving as good a profit as expected, traders might start opening positions without any analysis to back them up.

In such an instance, traders may add unnecessarily to a running loss in the hope that it will eventually increase, but it is unlikely that this will cause the markets to move in a more favourable direction.

Therefore, it is important to remain objective in your decision making during your time on the markets. To cut out emotions from your trading, you should base your decisions to enter or exit a trade on fundamental and technical analysis that you have carried out yourself.

9. Avoid Over Leveraging

Leverage allows you to trade a much bigger position even with a smaller amount of trading capital. But as we all know, leverage can be a double-edged sword. It can amplify both winning and losing trades.

One of the cardinal sins of traders – particularly of those who don’t fully understand how leverage works – is to use a high level of leverage. Some people only see the potential wins and ignore the potential losses.

If you use a high level of leverage and the trade turns against you, this could result in a total wipeout of your trading capital.

So, the best way to use leverage is to start low. Try using the lowest level of leverage offered by your trading provider. Once you are more comfortable with how leverage works, then you can increase the leverage level if you like.

Never hold and hope!

10. Failing To Cut Losses

Nobody wants to lose money. The temptation to let losing trades run in the hope that the market turns can be a grave error, and failing to cut losses can wipe out any profits a trader may have made elsewhere.

This is particularly true on a day trading or short-term trading strategy, because such techniques rely on quick market movements to realise a profit. There’s little point in trying to ride out temporary slumps in the market, as all active positions should be closed by the end of that trading day.

While some losses are an inevitable part of trading, stops can close a position that is moving against the market at a predetermined level. This can minimise your risk by cutting your losses for you. You could also attach a limit to your position, to close your trade automatically after it has secured a certain amount of profit.

Consistency, perseverance & discipline required

Trading is a difficult process, and it often takes some time to figure out what works for you. However, if beginner traders can avoid these common trading mistakes when starting their journey in the financial markets, then the learning curve will be much smoother.

It’s important not only that we understand our own biases, greed and fear but also how they play into the way we trade so that we have an opportunity to manage them accordingly.

Making trading mistakes are a part of the journey and you won't be able to avoid them all. From those mistakes comes lessons, use them to better yourself and be one step closer to becoming a great trader.

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