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Feb 09

8 Mistakes Day Traders are Making (and Lose Money because of it)

Reading Time: 4 mins

Day trading is the hot topic across the web now and if you believe the hype it’s just a matter of turning on your computer, logging in and making money.

But truthfully, if it were really that easy then everyone would be doing it and given the fact that most day traders lose money the question has to be; where do people go wrong?

Here are 8 top mistakes that day traders make and how to avoid them!

 

They think they are better than average

Did you know that in a study, 93% of American car drivers rated themselves as above average?

Obviously, not everyone can be above average but this type of cognitive bias affects humans in all aspects of life and day trading is no different.

Known as the Lake Wobegone effect, where all of the children are above average, it can be even more pronounced when you factor in the dunning-kruger effect.

The problem is when you think you’re ‘smarter than the average bear’ you can end up feeling more confident than your ability warrants and as a result, the average day trader will make unwise trades.

Injecting a little humility into your trading strategy means that you will research more, be more mindful of risk and more likely to take positions that are warranted by the evidence.

 

Trading without a strategy

Unbelievably one of the biggest mistakes that people make is that they start trading real money without any clear strategy.

The problem with this is it’s difficult to replicate smart trades and so it becomes difficult to produce a consistent money earning approach.

A clear strategy is founded on an evidential approach to trading and allows you to modify your approach in the light of actual results rather than hunches.

 

They lack education and research

Now let’s dispel the myth that good daytraders all got firsts from Oxford or Harvard!

The truth is that you don’t need any qualifications to be a great day trader but you do need to be educated.

Traders who make good money are the ones that do their research and really understand the market they are operating in.

They understand the different approaches, different strategies and the emotional impact of working the market.

Start off by doing some background reading, get a good day trading guide and generally invest in yourself and your development.

By spending some time giving yourself a good ground-up education in day trading you’ll have the best chance of getting up to a flying start.

 

 

Holding losing positions

When you take a position you expect that it’ll make money, but that doesn’t always happen even for the superstar day traders.

The truth is that there will be losses but bad traders find that hard to deal with.

Typically, they will see a red number in their portfolio and become determined to win it back.

But unfortunately, they choose to carry on holding the stock in the hope that things will turn around.

In fact, it is much better to liquidate a bad position and turn the cash back into another trade to make the losses back that way.

 

Risking it all

Bad day traders have a poor attitude to risk.

Linked to the point about emotion, a bad trader will get way too caught up in the emotional high of a big trade.

They’ll see what they think is a sure thing and go all-in, despite evidence to the contrary.

Sometimes it will pay off and this is perhaps the most dangerous thing to happen because it reinforces the behaviour and the trader will continue risking everything until the day it doesn’t work.

A smart trader will balance risk and reward, understanding that a diverse portfolio means that overall the profits will be greater.

 

Chasing hot tips

There’s always someone who knows someone who knows about a hot tip.

The problem with chasing hot tips is that often, traders will dive in to get a piece of the action without doing their background research.

The worst place to be is to have bought a stock fro a company that you don’t know, that doesn’t fit in with your trading strategy and where the price starts to head south.

By all means, listen to tips but be selective. Ask yourself whether it fits in with your current strategy and if it does then do your research.

If it looks good then invest. If you miss out in the meantime then so be it.

 

Removing the emotion

Emotion plays a massive part in the life of a bad day trader.

They get excited by the wins and depressed by the losses and this means that they hold on to losing positions in the desperate hope that it will turn around.

They also start to chase desperation trades in an attempt to turn their day around when sometimes you are just on to a loser whatever you do.

Good traders see day trading as an analytical exercise and they understand that when things are going badly, it is sometimes better to just switch off the PC and go for a walk or down the gym.

 

Ignoring taxes (and expenses)

So often you hear traders telling you how much they make but that’s only half the story.

The winning positions, minus the losses are just turnover.

On top of that, you have to deduct the expenses of day trading like having a top internet connection, subscribing to news services and paying for a stock scanner.

Then, when you have deducted all of the costs of running your day trading business, you need to think about your taxes.

Your profit is then subject to taxation and this is where it pays to take advice.

Speak to a friendly accountant and find out the best way to organise your affairs so that you aren’t losing more of your money to taxation than you need to.

But whatever you do, don’t ignore the subject of taxation because if you hide your head in the sand it could come back to bite you!

 

To conclude – day trading doesn’t have to be hard

Day trading is all about understanding the market and understanding yourself.

The key is to never stop learning, finding resources and systems to help and testing strategies over and over to find something that works for you.

Once you eliminate the mistakes that bad day traders make you could well be on the way to making a healthy profit.

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