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INFO: Daytrading Mistakes

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Psionic Trader   Sunday, 04/01/07 06:24:20 PM
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INFO: Daytrading Mistakes

Common Day Trading Mistakes

The following describes some major mistakes which, if not avoided or dealt with, will almost certainly cause your day trading career to end in failure.

1. Lack of a Trading Plan

Many day traders fail because they trade "on the fly", without the benefit of any pre-determined trading plan. It is absolutely critical to have a complete, well-thought out plan of action before entering any trade. This includes the number of shares you will buy and at what price, the price at which you will sell the shares (if they go up) and the price at which you will sell the shares (if they go down) to cut your losses.

You should also decide, as part of your plan, how long you will hold the shares if the price fails to move at all, and at what price you may wish to add to or reduce your position.

Once you develop a plan, stick to it and do not change it solely as a result of your emotions. Discipline is a vital key to day trading success!

2. Failure to Control Emotions

It is highly unlikely that you will become a successful day trader if you allow your emotions to control your trading decisions. The most destructive emotions leading to poor trading decisions are greed, fear and pride.

Greed tends to keep a trader from closing out a position when a reasonable profit has already been made, in the hope that the stock price will go even higher. Staying in the market for too long (hoping for a huge windfall) is a strategy that backfires more often than not. Greed also tends to result in rash or impulsive trades.

Fear will have traders selling existing positions too soon or avoid buying a stock that should be bought. In other word, fear leads to trading decisions becoming "paralyzed".

Pride tends to keep a trader in a losing position for too long because of a reluctance to admit that the original trading decision may not have been the right one.

If you trade using the discipline that a good trading plan is designed to foster, keeping your emotions from unduly influencing your trading decisions will be easier to achieve.

3. Failure to Accept and Limit Losses

Another major contributing reason to day trading failure, is the reluctance of many traders to exit from a losing position. Many traders hold on to losing positions for far too long, in the hope that the share price will recover. Even worse is the practice of adding to a losing position so as to "average down". This is a recipe for disaster. It is essential to limit (and accept) losses in advance, in accordance with your trading plan, by pre-determining your exit point if the stock price moves against you. Stop-loss orders provide a convenient method of doing this.

4. Lack of Commitment

Day traders who are unwilling to make a serious commitment of time and effort to study and monitor the markets, engage in training and education so as to enable them to learn about technical analysis, new trading systems and methods, order routing software, etc., will almost always fail.

5. Over-Trading

Many traders feel the need to hold positions in the market at all times on every trading day. There are many occasions, however, where it is best to stand aside and avoid holding any position in the markets at all. Always conserve your trading capital for those trading days offering good trading opportunities. In addition, it is best to avoid holding positions in too many stocks at one time, as this complicates your trading plan and increases transaction costs.

http://daytrading.about.com/cs/educationtraining/a/major_mistakes.htm

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