Day trading of futures contracts, foreign currencies or stocks can be profitable and very satisfying. It can also, unfortunately, be an absolute disaster. Here we will look at the dark side of day trading and point out common pitfalls to avoid. These include excessive use of leverage, blindly following “tips,” letting risk management fall by the wayside, not dealing with stress and burnout, and not keeping up with the skills necessary to day trade effectively.
Overleveraging
When a day trader has a number of successful trades there can be a temptation to leverage their positions in order to multiply their profits. A common way to do this by trading on margin. The day trader borrows money from their broker to replace part of their own money in a trade. When this works out and a trade is successful the return on trading capital can be multiplied. There is a small amount of interest to pay for borrowing money. When the trade does not work out the day trader stills owes the broker for the loan plus interest and the loss on the day trade is multiplied. A successful day trader always considers the risk when choosing to leverage their trades.
Chasing Hot Tips
As a rule, success in day trading comes from having a sound strategy and applying it with discipline on each and every trade. Part of one’s approach is always finding the most potentially profitable assets and conditions in which to trade. This studied approach gets all muddled when the day trader follows a “tip.” A tip is commonly a way that the day trader can take a shortcut to get to his or her trading goals and make much more money than usual in so doing. Always diligently check out tips before following them. And always remember that when something seems too good to be true it very commonly is too good to be true.
Ignoring Risk Management
Few things in life are totally certain aside from death and taxes. Markets are never certain and never totally predictable. The best day traders have losing as well as winning trades. What differentiates the most successful day traders from the rest of the pack is that they limit their losses on losing trades by always applying risk management strategies. This generally means limiting the use of leverage to carefully selected situations, thoroughly investigating tips, always setting stop-loss and take-profit targets, and always trading with discipline in entering, managing, and exiting their trades. Day traders ignore risk management at their peril.
Burnout and Stress
As with other life situations, stress in day trading is not limited to when things go wrong. The constant attention that a successful day trader has to apply to his or her work can take a toll on their mental health and then on their trading. The best way to avoid this pitfall is typically to seek a balance in one’s life between work and the things of life. The things of life as noted in Seasons of a Man’s Life by Daniel Levinson include family, friends, community activities, giving back in terms of helping others up the ladder to success, physical activity, hobbies, and any other thing that engages one and enriches their life. For a day trader whose life has been consumed by work and who does not know where to start on this path, begin by scheduling time physically away from the trade station and away from one’s place or work.
Lack of Education
You need a basic set of skills in order to become a benchmarked professional trader. With those skills a day trader devises a successful trading plan. When one’s day trading life is successful there may be no reason, in the short term, to make any changes. However, waiting until your day trading and your profits suffer before updating your approach is not wise. Markets are always changing and a day trader needs to stay abreast of those changes. This typically means staying in touch with folks like DayTradeSafe to remain aware of what is necessary to keep up in a changing trading world.