There is an endless supply of pitfalls if you are trying to make a living day trading stocks in these volatile markets. It takes more than just steel nerves and a pocketful of cash to succeed. It takes a tremendous amount of discipline and strategy. Here are a few reasons many day traders end up going back to their nine to five job.
Don’t play with scared money – If you are planning to go into a career in day trading do not start by taking a loan against your home or borrow on credit cards. You cannot be objective in your trading if you are concerned that if a trade goes against you the only solution is to sell the position. It’s an axiom as old as the hills but has never been proven to be wrong. You will have to build an ample cash supply first to avoid this most egregious error.
Mismanagement of funds – There are two types of people in this world when it comes to cash management. The first will stay within the limits of what they earn, and the second will spend freely and try to find a way to earn enough to pay for it. It would behoove all day traders to try to mimic the first type. You must be pragmatic when it comes to the amount you invest in your trades. You have to stay within certain monetary boundaries, and never commit more than a portion of your dowry to any one trade.
Impatience – Greed and fear rule the mind of the trader. You have probably heard this before but a subtle reminder is imperative. You will most definitely have both winning trades as well as losers. If you have ever traded, or gambled, you know both sides of this equation. When we have winners our first thoughts are filled with delusions of grandeur. We cannot lose. We are impervious to life’s pitfalls. We know this isn’t true. It will be confirmed when that large winner turns out to be a loser at the end of the day. Conversely, when we are taking losses our first reaction is fear and that may lead to quick decisions to sell. You must have the ability to step back and assess the situation before making any moves.
Not having a plan – If you do not have a quantitative system in place for selecting stocks, don’t bother to day trade. You must have a strategy for what stocks you buy and sell and you must hold firm. After selecting stocks you must also have an exit strategy for both winners and losers. You cannot predict the future movements of the markets, but you better have a strategy in place for both sides.
Looking for the next best system – My grandmother used to go to the racetrack and only bet on the horses with the prettiest colors. Was this a perfect system? I would venture to guess it was probably as good a system as any other out there. Nobody has a perfect system for anything. What you want to do is to refine, and implement ways to improve it based on past performance. What you want to avoid is to keep looking for the Holy Grail, for it doesn’t exist.