10 Day Trading Risks You Must Avoid Now!
If you really want to avoid day trading risks you need to avoid the traps, misconceptions and emotional imbalances of fear and greed that comes along with trading.
You see there are warnings on all the various day trading risks from here to the moon yet I see so many people continue to make the same mistakes again and again and… well… you get the point.
Day trading is a marathon and not a sprint. That means that the process is a slow building journey that evolves, grows and develops.
Naturally the journey is going to be challenging because money and emotions are involved but it can be much less challenging if you know how to avoid the day trading risks.
Let’s take a look!
Know What You Are Doing Before Doing
I remember one time, when I first started trading successfully, I was in a chat room and one of the subscribers said, “HELP, I am stuck short 500 shares of XYZ and I don’t know how to get out!!!”
Really? I said, “you are far from stuck. I, on the other hand, am stuck in a marriage with 2 kids. Push the buy to cover button and voila you are out. I have no button. NONE!”
I don’t think he appreciated my humor but their is something really risky about not know what you are doing.
If you want to avoid any of the day trading risks you must know the basics… especially how to enter and exit a trade before doing so.
Would you get onto a speedy highway and not know how to exit? Would you fly a plane without knowing where the controls are? Would you perform heart surgery if you didn’t know which side of the body the heart was on?
I think not.
Be smart and know the basics and what you are doing before you do it or you will lose more money than you ever imagined.
Tip – Practice on a simulator before you place a live trade.
Plan Your Trades or Don’t Trade
Even as you are learning how to trade your plan must be specific. You can not estimate or wing it for continual success. It just won’t happen.
How specific must your day trading plan be you ask?
Here is an example.
I am going to buy 1000 shares of stock XYZ if it goes to $9.91. I will sell half (500 shares) at $10.09 and the rest at $10.21. If my plan should be wrong I will bail out on the entire position if $9.75 breaks.
Do you see that plan above?
It is simple and very specific. There is no guessing in what I wrote. That is how your plan has to be before you decide to place a trade.
It must be specific.
Doing so will eliminate some of the financial day trading risks that can be easily avoided if you have a plan.
Tip – Write down your plan and have it in view as you are trading. Doing so will save you time, money and headaches.
Fear of Missing Out – FOMO
The fear of missing out on a trade can destroy your account.
Time and time again I watch people chase trades that other people are profiting from.
You cannot chase your trades unless you have made a plan which accounts for the proper share size for a chase trade.
That means that if the move is in action and you have missed out on the trade then you have missed out.
The only thing you can do in that moment is watch it and applaud those who have benefited from the trade.
Tomorrow is a new day and once you have your plan all ready you can trade accordingly.
Tip – Do not let FOMO get the best of you. Shut your computer off, go out for a walk or start a blog but do not try to trade once the trade is over.
No Averaging Down
Don’t just listen to me when it comes to averaging down. Listen to the best of the best.
Warren Buffet said, “It’s a common mistake to attempt to “average down” on losing positions. Instead, you’re better off cutting your losses and finding a better way to use that money.”
Paul Tudor Jones used to have a sign in his office that read: Losers Average Losers.
Jesse Livermore had many trading rules and never average losses was one of them.
It is so tempting to average down on a trade when you are in a losing position but doing so can be one of the most catastrophic day trading risks of all.
When you are in a losing position, the stock market is telling you that you are wrong. Averaging down does not make you right. It makes you wrong with double the size.
Once you have double the size in a losing position you have the potential to lose more money and never the potential to gain more.
Well, think about it like this. If you average down on a losing position you will tend to bail out on the entire position once you see you are in the green once again.
In essence, you are happy to be break even as you yourself knew exactly what the market was telling you from the start.
You were wrong.
Tip – If you are in a winning trade look to average up or add to your position. Adding to a winner is always the way to go.
Don’t Risk More Than You Can Afford
There are many day trading risks that can sneak up on you without you knowing it and destroy your account immediately.
This very thing happened to a trader named Joe Campbell who decided to short KBIO.
It was November of 2015 and Joe was short about 8,400 shares at an average price of a little under $2 because the stock appeared to be “worthless”.
Then while Joe was in a meeting, controversial biotech CEO Martin Shkreli, bought more than half of KBIO KaloBios’ outstanding shares.
His purchase along with the short sellers who were running to cover their positions, ran the stock up more than 600% in the after-hours session.
In the end Joe lost $106,445.56. Money he did not have or couldn’t afford to lose.
He subsequently started a GoFundMe page to ask the public for a little help.
While, I will admit that that is a rare case I think it is important to know that those types of risks can be avoided if you know how much you can afford to lose.
Joe didn’t think of the risk of shorting a low float, bio pharmaceutical stock and paid the ultimate price.
Tip – Never hold a bio pharmaceutical stock short overnight. You never know if the company you are short has the ability to cure cancer.
Accept that the Market Can Be Illogical
Sometimes the stock market makes no sense and sometimes certain stocks make even less.
For example. A few months ago, Elon Musk said Tesla didn’t ‘deserve’ the market value it was given. However, TSLA is nearing all time highs (again) and doesn’t look to be pulling back anytime soon.
TSLA is up more than 40% this year but it lost over $300 million for the first 3 months of 2017.
In addition to that, Tesla made about 84,000 cars last year, equivalent to just 1% of Ford or GM’s annual sales and yet TSLA is nearing all time highs.
Look I am not saying that TSLA is a short nor do I think it is a garbage company. In fact, I think Elon Musk is a genius and Tesla is a real product that people love. But when the numbers don’t look good and the CEO says things like, launching a car company is “the worst way to earn money,” you have to wonder.
Why is the stock market so illogical?
Tip – Don’t be stubborn. You can always get back in to a trade if you were stopped out for being wrong.
If You Don’t Cut Your Losses Your Losses Can Kill You
You are going to lose money in the stock market. We all do.
How much you make over those losses will determine if you stay in the game or not.
That is why you need to cut your losses before they get out of control.
The last thing you want to do is turn a day trade into a swing trade or investment because you are too stubborn or proud to take a loss. That can prove to be disastrous.
Most times the best way to take a loss is to just cut it lose.
Even if your plan works out after taking the loss it’s better to take the loss than using the hope and pray strategy.
What is the hope and pray strategy?
Oh God I hope this stock comes back so I don’t have to take a loss. Oh please God I will never be a bad person ever again. PLEASE!
So, 1,2,3… Rip the band aid off and scream all you want but the longer you wait the louder you will scream later.
Tip – Remember to always stick to your plan.
Don’t Over Trade
This is another one of those day trading risks that you won’t know about until you look at your commission statement and profit and loss chart. Trading isn’t cheap.
So, if you are trading just to trade you are bored. Period! And that style of trading won’t sustain a profitable lifestyle for very long.
I personally do not over trade because trading can be very expensive and taxing on the emotions.
I am either right or right out.
I have my trading down to a science and I pretty much do the same thing everyday.
I get up, I build my watchlist and make my plan. Then I either trade or I don’t depending on how things set up.
Then I close it down for the day because I am a morning trader.
Here is what I mean.
81% of my day trades were before 11am last year. 96.51% of them were before noon and 100% of them were before 2pm.
Again… I am either right or right out and on to writing in my beloved site Beyond Debt.
Tip – Start a blog. My blog helps people, it helps me and it makes me money.
Have a Max Loss Number
If I take a $100 loss I am devastated. Yes devastated.
I hate losing money but I hate losing more money than I need to lose and that is why I always set a max loss on a trade.
For example, I might want to buy 1000 shares of stock XYZ but if I do that then I am only allowing myself a 10 cent loss before I cross the devastation zone. That is pretty tight and might prove to be costly even if my plan is right in the long run.
So, in a case like the one above I might lighten my share size and expand my spread.
If I buy 500 shares of XYZ then I give myself a 20 cent spread which might work out in my favor over the 1000 shares.
Not knowing how much you are going to risk (or spend) on any trade is like going to a car dealership, handing them your wallet and saying to them have fun with me.
You must add in your max loss amount on every trade with your plan and don’t go beyond that.
Tip – Start small when you take your losses. Losses have a funny way of adding up fast.
Track Your Trades
You need to track your trades and you need to write notes about the trades you take.
That means you need to know what went wrong and what went right.
How else are you going to make adjustments and grow?
Maybe you didn’t follow your plan or maybe you got in at the wrong time but you won’t know if you don’t track your trades.
It’s always easy to second guess yourself or believe something that wasn’t there in the first place, however, if you have your trades on a spreadsheet you will know exactly what you need to know.
Tip – When you track your trades make sure to keep it simple and easy to understand so you never confuse yourself looking back on what you did.
I think it is obvious you are going to have day trading risks but if you know what those risks are you are more likely to stay clear of the ones you can avoid or minimize.
If you find yourself taking on too many risks in the beginning you might get frustrated or quit without giving yourself the chance you deserve. I am not leading you to believe that trading is easy but taking less AVOIDABLE risks makes it less difficult.
Remember you are a business and your business is trading. You will have to risk. That is a fact…
However, that doesn’t mean you need to partake on unnecessary and avoidable day trading risks.
If you need any help don’t hesitate to contact me here.