Day trading is a great way to make money, but it’s also a great way to lose money — and that’s just what a lot of rookie day traders do. Inexperienced day traders make the rest look bad by face-planting right out of the gate, losing money, and turning others off of day trading entirely.
Don’t be the person who starts out on the wrong foot. Don’t wait to learn from your mistakes. Learn from the mistakes of others. Here are five mistakes that far too many new day traders make.
They don’t have an emergency fund
Day trading is full of risk. That means it’s full of opportunity, too, of course, and some days you will surely see impressive returns. On other days, though, you won’t make anything — or you might even lose money. And if you go on a losing streak, you could be without income for a while.
That’s why you need an emergency fund. Actually, everyone needs an emergency fund — but, as a person whose income may be inconsistent, you need a bigger one. Make sure that you have enough cash on hand to cover unexpected expenses and gaps in income.
They gamble their nest egg
You should invest your retirement savings. But you should not day-trade with that money.
Why is this? Because of the disparity in risk, of course. Investing your retirement fund in safe, steady places will help you maximize its value. But investing it in the way that you invest your day-trading cash will expose you to enormous risks. Day trading is far too volatile for you to be using money you can’t afford to lose.
They trade with their emotions
Day traders tend to be pretty smart folks. In a lot of situations, they know exactly what to do. But they don’t always do it. Why? Because their emotions get the best of them.
There’s a psychology to investing that is almost like that of gambling. It’s easy to feel like we’re “due,” and studies show that we can become thrilled by a close loss in a way that is similar to actually winning a bet (whether it’s at the slots or on the market). Winning makes us want to keep making bets, and losing makes us want to chase losses.
All of this means that we don’t behave as rationally as we’d like to. If you’re going to do well as day trader, you need to keep your cool. Don’t rely on your emotions or your own “gut feelings.” Rely on something else — a strategy.
They don’t have a strategy
The best way to avoid making mistakes because of your emotions is to get yourself an investment strategy. A carefully researched investment strategy that works well can effectively give you some guardrails or even make some decisions automatic. When you come across a tough decision or get emotional about something, you can simply ask: What does the strategy say that I should do?
Do your research. Decide whether you’re a big believer in fibonacci trading, whether you’re going to target certain breakouts, and so on.
They have too many strategies
Having one strategy is good. Having more than one? Not so much.
When you have multiple strategies on your mind, you’ll find reasons to do almost anything — which means that you’re right back to square one and letting your emotions dominate your thinking. You’ll be relying on “gut feelings” all over again, with them dressed up as proven strategies.
This doesn’t mean that you can’t try different strategies. Use simulators to play around with different ones until you find a favorite. But when you get yours and it comes time to use it with real money, get serious and be monogamous with your trading strategy. It will pay off.