7 Deadly Sins of Day Trading

by Steven Fox
(San Diego, CA)

One of the most important attributes of a successful day trader is simply avoiding mistakes and minimizing losses. Put simply: you do not have to do everything absolutely right to be a successful day trader, you just have to manage to not do things wrong. After recently reading the book “Overcoming 7 Deadly Sins of Trading” by Ruth Barrons Roosevelt, I decided to create my own list of “7 Deadly Sins of Day Trading”. But while I enjoyed her discussion of 7 psychological traits that are devastating to successful day trading (she lists perfectionism, fear, pride, impatience, greed, anger, and recklessness), I decided to focus on 7 specific actions and patterns of behavior to avoid instead. These are all mistakes that I have either made myself while day trading or have known other traders to commit, and they are all severe enough to blow up your account if you don’t learn to avoid them.


Trading things you don’t understand:


In the very beginning I, like many novice wanna-be traders, wanted to get into trading anything and everything I could get access to as a naïve individual trader with a few thousand bucks in an online brokerage account. Penny stocks, ETF’s, REIT’s, options, LEAP’s, E-mini futures, 6E and other currency trading, and many other derivatives that I had no business being involved in. I was trying to trade exotic financial products that I knew almost nothing about, and was failing miserably. Sure I had read a couple of basic books and could have told you what bid/ask prices are, the differences between a put and a call option, and what open interest means when talking about futures contracts, but the truth was that I was in WAY over my head. I was excited about this fast-moving new world and jumped in too quickly with both feet, and lost my discipline. If you don’t have a complete and thorough understanding of the purpose and structure of a financial product that you are trading, as well as exactly how that trade can go for or against you and the risks involved, then stay away from it! At the very least, if you think you’re interested in something after reading a couple books and talking to other traders then you should paper trade that financial product until you are consistently profitable at it and then jump in. NEVER trade something that you don’t understand.


Not having a plan:


This is one lesson that took me far too long to learn, but once I did learn it (the hard way, of course) I noticed a drastic improvement in my trading performance. Every single time you enter a position, you need to decide beforehand exactly when you will exit that position. This is crucial, so I will say it again: every single time you enter a position, you need to decide beforehand exactly when you will exit that position. This means setting a profit target and a stop loss. It is imperative to make this decision before you enter the trade, before you are subject to the wild emotional swings that can happen to any of us during big market moves whether they are for or against you. Either put in the stop orders immediately upon entering the position or have the discipline to HOLD YOURSELF TO IT if you decide to use mental stops instead of actually entering the orders. If you fail to do this and find yourself cancelling stops and trying to add to a losing position to average down, then you will quickly find yourself with a blown-out account. It’s also important to stick to profit targets or at least set a trailing order to close a profitable trade, before you let a winner become a loser.


Not tracking your trading performance:


This is another lesson that took me far too long to realize the importance of. You’ll probably have to hear it and read it a hundred times from all different traders before it really sinks in and you actually do it, but keeping a trading log/journal is essential to your day trading success. Doing so will help you recognize what works and doesn’t work for you, whether it is specific trading strategies, timeframes, markets you’re trading, or any other important information. If you find for example that your winning trade percentage is 65% in the morning between 9 and 10, but 35% between 3 and 4 in the afternoon, then you should probably stop trading in the afternoons. The reasons that this is true aren’t particularly important. That could be the case because maybe you are more tired in the afternoons, or more distracted, or more rushed, or simply that the types of patterns you look to trade don’t appear as often during certain timeframes and the market isn’t often appropriate for your specific approach during those times. However, if you don’t keep a log at all then you may never notice these types of things.


Trading when you are not mentally prepared:


I ride a CBR1000RR motorcycle, which is extremely fun but also extremely dangerous. I would never get on my bike and go for a ride if I were tired, drunk, stressed out, angry, distracted, or had any other mental condition that could impede my ability to ride safely and properly react to any situation I encounter. I have the same approach to day trading. Trading is already hard enough as it is, don’t stack the odds even higher against you by trading when you are not mentally at your best. The consequences can be severe.


Overtrading:


This is one mistake that nearly all beginning traders commit, especially if they’re looking at a time frame that is too small (1 min, 5 min charts) and trading based on random market “noise” rather than actual significant market movements. Yes, it can be extremely boring at times to stare at charts and read tape for hours at a time with almost no action and no solid set-ups that offer opportunities to enter a high-probability trade. That is just the nature of the beast, some days will be slower than others. But entering a position just for the sake of entering a position can have disastrous results. If the markets are either slow and sideways or wildly and unpredictably whipsawing all day with no solid set ups, then stay out. Never enter a trade without a good reason. Make sure that if another trader were sitting there watching you and asked you why you entered that position, you would have a good answer besides you being frustrated at not having made any trades in the last 4 hours. When profits are there, take them. When they are not, don’t try to force it or think that you can use your Jedi powers to bend the market to your will. Doing so will lead to trading losses and massive commission costs.


Letting emotions get in the way:


All of the other trading mistakes I discuss here hint at this as well, but it is worth re-emphasizing. Fear and greed may be what drive markets, but they should absolutely NOT drive your decisions in the markets. Fear of losing on a trade can either prohibit you from entering good trade setups that could have been profitable, or cause you to close a winning position far too early. Greed can cause you to hold for far too long and allow a winning trade to become a losing trade. Maintain a disciplined approach and don’t let fear, greed, or other emotions drive your decisions. Plan your trades, and trade your plan. There has of course been much written about this topic, but reading can only do so much. If you are to become a successful day trader, then developing the ability to stay disciplined and allow reason to make your decisions rather than emotions is the single most important attribute to have.


Trading while undercapitalized and overleveraged:


This one should be obvious, but is an extremely common and costly mistake among new traders. Leverage can be a beautiful thing, enabling you to earn a much higher percentage of returns than you could otherwise gain. However, it can also of course work equally against you, magnifying trading losses quickly. New traders too often fail to remember this, and allow their account to draw down far too much on a single trade. Proper money management is absolutely essential to successful trading, in fact it is even more important than having a high percentage of your trades be profitable. You can be successful if only 30% of your trades are profitable, as long as you have the discipline to allow your winning trades to run and quickly cut your losses on losing trades. If you are working with a $10,000 trading account and allow an over-leveraged losing trade to draw down your account by $2,500, then you will never be successful. Decide before entering the trade the exact percentage of how much drawdown you will allow, and never put 100% of your account into a single trade unless you have a well-defined and very tight stop along with the discipline to actually execute that stop in the event of a loss. The maximum account drawdown I will allow on a single trade is typically between 2-4%. Never trade with money that you cannot afford to lose, and absolutely do not borrow money to speculatively trade. That is not disciplined, professional trading. It is gambling, and it is a quick and sure route to financial ruin.

Final Thoughts

There are of course many more mistakes that day traders make than what I can list here, but these 7 Deadly Sins of Day Trading are some of what I consider to be the most severe and most common ones made. Remember to treat day trading as a business, with a professional and disciplined approach. For a more thorough discussion of psychological mistakes traders make, see “Overcoming 7 Deadly Sins of Trading” by Ruth Barrons Roosevelt. Use the comment section below to add to the discussion and explain what you think are the biggest mistakes traders make.

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