Top 5 Beginner Day Trading Mistakes
If you’re learning to trade and find yourself taking one step forward and two steps back, you might be making some deadly trading mistakes. This might be an unpopular opinion, but learning to trade definitely takes a little bit more than some winning text alerts, dvds and some lamborghini motivational posts on instagram.
I've been trading for about 6 years now, and I've literally made every single mistake in the book. Since the stock market is ruthless, the moment you start thinking you know it all is the moment you will be humbled. Hence the name of my YouTube channel, Humbled Trader.
Here are the top 5 day trading mistakes beginners make and how you can identify and fix them in order to avoid blowing up your small trading account:
1. Not Having a Trading Plan
There's a saying that goes, “when you fail to plan, you plan to fail,” and that cannot be more true when it comes to day trading.
Before getting in a trade, you must create a trading plan. I spend 1.5 to 2 hours before the open each day planning out my trades. You cannot just jump outta bed 10 minutes before the open and expect it to rain Lamborghinis. Yes, it takes time but that’s exactly the point. By taking the time to write down your thesis, risk reward, and exit plan, you are already setting yourself up for a higher probability of success.
Your trading plan should at least include your bias long or short, all the important price levels over and under, potential entries, exits, and stop losses if you are proven wrong. Yes that’s right, part of a trading plan especially in this volatile market is planning for your loss and keeping that loss under control. Planning your trades is 90% of the work in day trading and once the plans are done premarket, I just spend the rest 10% of the work executing my plans.
2. Over Trading
Over trading leads to emotional trading, and eventually to revenge trading. Where you are just going back to the stock you’ve just lost on and attempting to make that money back.
Here's how you can prevent over-trading. Follow your stop loss. No excuses! If you planned on getting out of that trade at $8, do it. Yes you are taking a loss, but it’s a planned loss within your risk profile from your trading plan.
Next, walk away from your computer during the lunch hours 11:30 to 2:30pm EST. Generally those are the hours where stocks are consolidating and not much action happens. Trading only the open and close hours will allow you to get the meat of the move and not waste time and money on set ups that won’t be profitable due to lower volume.
Most importantly, when you start getting emotional, walk away from your trading station. Most emotional trading leads to even bigger losses. I know because I’ve done it... many times. So take a break, walk away, the market will still be here when you are back tomorrow with a clear head.
3. Not spending enough time paper trading before going LIVE
I get it, people want to make money, fast. I was guilty of that myself. Instead of spending 1 or 2 months learning the mechanics and learning the proper set ups, I jumped right in with real money after like a week. I really wish I hadn't done that.
Paper trading, which is trading with simulated money but on Live charts, allows you to learn to plan out your trade and also get familiar with the technicalities of your broker interface.
Not only will paper trading allow you to get used to your broker interface, it’ll also allow you to get screen time in the market and learn your technical analysis skills. We have all seen these chart templates with these clearly labeled candle patterns that make trading seem so simple.
Take your time with paper trading, practice your discipline and strategies this way and the market will still be there when you’re ready to go LIVE with real money.
4. Scaling up too quickly
I remember how happy I was after I started making $100 each day. Hey, $100 a day is $500 a week! Not bad for trading about only three hours a day and heading to work.
Then I started thinking, “If I just size up my shares by adding a 0 to my share sizes, then I’d be making $1000 a day, which is $5000 a week”. Well, let’s just say this overconfidence with sizing didn't end up too well for me.
Not only did I lose all the small $100 dollar wins from the last few weeks, I completely blew my account. I didn’t take into account the emotional stress scaling up would create. If my risk was $30 loss to make $100 a day, suddenly the risk is now $300 to make $1000. While I wanted that nice number of $5000 total in one week, I wasn’t ready for the $1500 losses. Scaling up too quickly will inevitably lead to emotional trading.
Traders, please take your time with sizing, give it months before even adding a quarter size. Take it slow, this will allow you to mentally prepare for the possible bigger proportional losses.
5. Following chat room alerts to buy or sell stocks
While being a part of an online trading community where you can share ideas and ask for feedback is critical, following alerts from chat rooms telling you to buy or sell a stock will put you months – if not years – behind on your journey to becoming a profitable trader.
Most of these rooms give you alerts to buy or sell without breaking down why you should do so. This creates followers who blindly buy in without any plan, which was our mistake number 1. And guess what, most of these people lose money because they don’t even know why they were in the stock in the first place, and when the stock goes down soon after, they panic and they market order out for a huge loss.
You could be lucky and make money from these alerts, once a while. If you are fast enough and have no internet latency. In the long run, being a follower will drain your account, especially if you are in penny stock chat rooms with thousands of followers. These are what we call, chat room pumps.
Trading is not easy, but it can be learned slowly if you put in the time and work. It all comes down to sacrifices. Do you want this bad enough? Maybe it means partying a little less on weekends, eating out only once or twice a week, or sleeping only six hours a day and just not having a life.
