How to Avoid the Biggest Day Trading Dangers
Many people are enticed by the many benefits of day trading: the ability to work at home, on your own hours, the independence and freedom from having to work a day job, and last but certainly not least, the potential to make huge sums of money. However, on the other side of these potential rewards of day trading lay the daunting dangers that lurk on the other side. In this article, I will discuss the dangerous aspects of day trading and tell you what you can do to avoid them and get your day trading career off to a safe and profitable start.
Make no mistake about it. If you don’t know what you are doing, your entire trading account can vanish with the blink of an eye. As a new trader you should always be aware of this potential downside, and initially your entire strategy should revolve around educating and training yourself properly to ensure that you know what steps to take to avoid losing your entire trading bankroll.
Many new day traders pride themselves on having a “nose for the market,” and believe that they can trade off of hot tips, or simply look at a stock chart and divine the next great stock move. It is this kind of ungrounded overconfidence in one’s own abilities that has been the downfall of many a new trader.
The first key to successful day trading is knowing what you do not know, and never simply assume that you know more than the collective market as a whole. Before taking a position on any trade you need to ask yourself: what is basis for the trade I am about to make? If you can not clearly and logically answer this question, you are likely setting yourself up for failure.
Another huge mistake that beginning traders make is failing to practice sound money management. How much money do you need to begin day trading? There is no one right answer to that question. Some traders have started on a shoestring and, likely due more to initial good luck than skill, manage to turn a few hundred dollars into hundreds of thousands and even millions. However, many more who begin under-capitalized end up losing it all. Make sure you have a reasonable amount of trading capital, and make sure that this is money that is separate from your daily finances.
Another question you need to be able to answer is: how much of my total trading capital should I risk on a single trade? Here too, many novice stock traders, forex traders, and futures traders fail to answer this question, allot too high a percentage of their bankroll on a single trade, and find themselves on the brink of ruin when that trade turns the wrong way.
Smart, experienced, successful traders know that you should only devote a relatively small portion of your overall capital to any one trade, so that you can avoid ruin even when your trade does not work out the way you had hoped.
Another danger that you must learn to avoid is hanging on too long to losing trades. It is often said that the psychological aspect of day trading is at least as complex and challenging as the mechanical aspect. One of the most common mental errors that inexperienced traders make is becoming attached to their initial positions.
For instance, you go long on a stock that you feel sure is going to make a strong upward move. The market does not cooperate and instead moves down. Rather than close out your position and take a small loss, you stubbornly hold on to your position, convinced that the stock will turn in your direction. Even as the stock continues to plunge further south, you continue to hold on for dear life. When the dust clears, you have taken an enormous loss.
The best traders know that many trades will not go as planned, and are able to objectively and quickly exit losing positions before a small loss turns into a huge one. As a new day trader, you must be able to do the same. Also, you could look here.