When it comes to day trading, making mistakes is inevitable. However, understanding the most common errors traders make can help you keep financial losses to a minimum.
Keep reading to learn about four common day trading mistakes and steps you can take to avoid them.
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Not conducting adequate research into the stocks you want to purchase is a big mistake. Many day traders, especially new ones, just want to trade. They tend to get impatient and jump into a stock without learning about it first. Avoid this by taking a few hours to perform some research.
When you find a stock you’re interested in, conduct a web search of the company. Study its business plan and check out its debt-to-asset ratio. Look at the general economic outlook for its industry, paying special attention to any upcoming political or economic events that could affect it.
Starting Too Big
Starting too big is a mistake. Purchasing thousands of shares when you’re a beginner often leads to huge losses. Instead of leaping into the market, slow down and ask yourself, “What is day trading going to do for me, and how do I keep losses to a minimum?”
One of the best ways to minimize losses when you’re new is to limit your trading to 100 shares of stock each day. This restricts the amount of money you can lose while you’re learning. Trading small keeps your losses small.
Trading Too Many Stocks
Don’t trade too many different stocks when you’re inexperienced. While tempting, trading several stocks at once further complicates an already complicated process. Focus on one or two stocks at first. Learn their trading personalities and watch for patterns. When the market goes down, holding only a couple of stocks minimizes confusion and prevents panic from setting in.
After you’ve gained some experience, slowly increase the number of stocks you trade. A good strategy is to allow yourself to buy an additional stock once you’ve earned a predetermined amount of profit from the ones your already own.
Trading at the Wrong Time of Day
Trading at the wrong time of day is an error that even seasoned traders sometimes make. Day trading success depends in large part on market volatility, meaning it relies on fluctuations in stock prices.
Market volatility tends to vary throughout the day, often following relatively predictable patterns. For instance, the first 30 minutes after the opening bell is typically a volatile period. The market tends to grow quiet midday and begins to pick back up again during the afternoon. Experienced traders time their trades to take advantage of volatile time periods.
Time your trades to reflect your experience level. Use the volatile half hour in the early morning to observe and learn. After it’s passed, start trading. Volatility is often profitable, but it’s dangerous for beginners. Once you’ve learned market patterns, ease into trading during more volatile time periods.
Mistakes happen; they’re part of the learning process. The trick is to learn from them and not repeat them. Educating yourself about the most common errors traders make won’t prevent losses, but it can help keep losses small and your confidence intact.