The failure rate of new, would-be day traders depends on the source, but you’ll notice that most sources indicate 80-95%. With that in mind, in this article we’ve attempted to identify some of the primary contributing factors of theses failures. With some awareness of these pitfalls and a little discipline, you can make your own concrete set of rules to help mitigate these account killers!
#1 Trading without a plan
If you’re quickly flipping to view a chart on symbol for the first time during the day, and within a few seconds you say to yourself, “this is going up!” and then you click to buy, chances are that your day-trading career will be short lived. Successful day traders take the time to see what symbols are in play for the day and then analyze those symbols one by one while noting important price levels, potential entry prices, potential take profit prices, and potential stop prices. Before entering a trade, there is already a plan in place to minimize risk and maximize profits. This is a trading with a plan. Trading without one can be reckless and put a premature stop to your trading career.
#2 Trading with too much size
We’re all anxious to get the ball rolling and start bringing in super fat paychecks from our day trading profits, but with this mentality, many new traders take over-sized trades. Taking too many shares in relation to one’s account size is a quick way to blow up a new trading account. Part of a successful trading plan includes deciding how many shares you can buy/short while being able to tolerate the planned stop loss if the trade goes against you. If you take a position of such size that your heart-rate goes through the roof with every tick of the price, you’ve taken too much size and are now trading with more emotion than logic. Aside from adding undue stress to your life, this mistake is a sure way to end a trading career before it has a chance to get off the ground!
#3 Letting losing trades run
“It’s going to turn around soon!” “I’ll stay in just a bit longer!” “Surely it can’t keep going this way…” These are last words before a forced exit on a losing trade, and often before an account gets blown up. There are often times a variety of factors, including lack of an exit plan, too much size, and a violent move of the price in the wrong direction, that contribute to a person freezing up during a loss on a failed trade. You’re caught in the middle of a massive loss wondering how it got this far, and thinking there’s nothing to do but wait until the price turns around, but it doesn’t. Eventually you’re forced to exit the trade with a large part of your account gone. The market ha no biases, no feelings, and it absolutely does not care whether you are winning or losing. Follow your preset plan and get out of your position at your predetermined stop-loss level to minimize the damage the market can do to you. Take the small loss and live to trade another day!
#4 Revenge Trading
After taking a loss on a trade, it’s a natural reaction to be emotional. Maybe you’re confused why the same setup works every time you don’t take the trade, and now that you’ve tried it, it behaves oppositely. Or even worse, you get stopped out on the trade and immediately the price starts going the direction you wanted. It’s annoying and frustrating. You decide to take another position, and it goes against you again. Getting attached to a symbol like this is a losing game. It’s called revenge trading, and it spins out and turns what would be one or two small losses into a massive red day. It is best to move on to another symbol or wait for a better setup, or even another day altogether. Again, it’s about minimizing losses on red days and growing, or at least preserving, your account on better days!
#5 Cutting Winners Short
We’ve talked a lot about minimizing losses, but on the other end of the spectrum, cutting winning trades too early can also be a huge problem for new traders. Naturally, after taking some beatings on a few trades, seeing a trade turn profitable is going to create emotions that scream “take profits, now!” Instead, stick to your plan! Maybe scale out and take some profits, but leave some of your position unless a clear signal is given by the price action that the trend is changing. You’ve made a good trade. Let it work for you and maximize your profits. Holding losing trades and dumping winning ones is human instinct. Practice, practice, practice against this. Trading pure price action without emotions is the path to success.