Traders involved in day trading buy and liquidate financial instruments within a trading day so that all positions are closed when the market is still open for the trading day. This prevents unmanageable risks and negative price differences between the price at the close of one day and that at the start of the next trading day. With a computer, some cash, and an internet connection, you can start day trading. But this does not promise quicker profits and many new traders make mistakes that cost them a lot of money. However, getting training on day trading and the general trade from an expert in it can help traders avoid most of the costly mistakes.
Here are some common day trading mistakes to avoid:
Trying to Win All the Losses Back
Even with a risk management strategy, at times there can be a temptation to ignore it, to take a larger trade than normal. There are various reasons for this. After having several losses in trade, you can be tempted to get back some losses. Also, after winning continuously, you can develop the feeling that you cannot lose. At times you can get a trade that has a promise of good returns, making you want to risk everything.
New traders will often wait to confirm that they are right before entering a position. Due to that hesitation, there is a missed planned entry point, if right, it can force them to buy at a stock price that is higher than the one intended when there is an expected upward trend. Alternatively, they can sell at a price lower than the intended when there is an expected downward trend.
Trading Without a Stop Loss
For every trade made, there should be a stop-loss order. This is an offsetting order which gets you out of the trade if the movement of price is against you by a specified amount. With this on the trades, a large portion of the risk is taken out of the investment. If losses start arising from trade, stop loss prevent a situation where you lose more than you can handle.
Risking More Than You Can Afford Losing
The main part of the risk management strategy is establishing how much of the capital you can be willing to risk on every trade. A day trader should risk below one per cent of capital on each trade. This implies that a stop loss order should close out a trader if it results in a loss greater than one per cent of the trading capital. This implies that even by losing multiple trades continuously, the trader loses only a small part of the invested amount.