As a trader, you are solely responsible for your day trading actions and behavior. Your day trading success depends on how you act while trading. Here are 3 problem day trading behaviors that ensure failure. Fortunately, they are all within the control of the trader and can be corrected:
1: Trading Without A Game Plan
Traders who come into the market without a game plan are immediately at a loss. We are not talking about a trading plan, but a game plan. Your trading plan will specify trade setup criteria, risk parameters, markets and time frames traded, and the like. Your game plan tells you how you will implement your trading plan in the current market.
In preparing a solid game plan you will have thoroughly assessed current market conditions. The task of the game plan is to identify where the next trade setup is likely to occur, based on your assessment. If, for example, you are a day trader and the current trend has been up with no evidence of concentrated selling, then you might look to buy morning weakness against a key support level. Having a game plan gives you strategic points at which you look for a trade. Even if the market acts differently from what you expect, you have a reference against which to judge the market action. Having no game plan increases the odds you will be making random trades. Construct a game plan every night as part of your nightly preparation. problem
2: Trading With Too Much Size
Novice traders see a market move and think, “If I traded this with 10 more contracts, I would have made real money!” Thoughts like this bring a trader downhill very fast.
Professional traders keep their risk under 2.5% for each trade. The reason is they have a healthy respect for the probabilistic nature of trading. Even when a trade setup looks perfect, there is still a distinct probability it will fail. How much can be lost and how best to manage the risk is the prime consideration for the pro. The novice’s attention is on how much profit will be made. Trading too much size places the trader well outside reasonable risk parameters. Any mistake can be account-damaging. Learn money management and set a responsible risk threshold you do not violate while trading.
3: Adding To A Losing Trade
This is a seriously poor trading behavior. Called “averaging down,” you add to the position and average the entry price down as a market goes against your original position. The idea is that with a lower average cost of the trade, you can exit gracefully when it reverses or pulls back. This works many times, but lulls the trader into the belief that a losing trade or mistake can always be corrected. Not true.
A trading friend routinely “averaged down” when he got into trouble in a trade. One day, the market really went against him. He continued to add to a losing position, thinking he would fix his error. He added so many losing contracts that his broker finally had to step in and close the position. He lost over $300,000 in this one trade in one day. Avoid this very poor habit by cutting losing trades quickly.
These and other problem day trading behaviors unnecessarily complicate a trader’s life. You may not be in control of the market, but you are in control of how you act.