Common Day Trading Mistakes - dummies

Common Day Trading Mistakes

Part of Day Trading For Canadians For Dummies Cheat Sheet

Day trading is tough. Most day traders lose money, in part because they make obvious, avoidable mistakes. Here’s a list of some of the most common mistakes that day traders make. Following them is no guarantee that you will make money trading, but it will certainly reduce your risk and improve your odds of being a day trading success in Canada.

  • Starting with unrealistic expectations. Some research shows that 80 percent of day traders wash out in the first year. Yes, some traders make a lot of money. But they are the exception.

    If you go into trading knowing that it’s hard, that you should risk only money that you can afford to lose, and that you need to think about it as a business, you’ll have a leg up on those who think they’ve found an easy way to make millions from the comfort of their own home — and who are then stunned to discover they are broke.

  • Starting without a business plan. Successful businesses have business plans, and your trading business is no different. You need to specify what you are going to trade, and when, and how, and with how much money, before you get started.

    You need to determine what equipment you need, what services and training you want, and how you will measure your success. Having the plan will keep your expectations in line and create a professional starting point for your new trading venture.

  • Starting without a trading plan. A business plan sets the framework for your trading business, but you need to fill in the details. How are you going to trade? What signals will you watch for? Why will you enter a position, and why will you close it? That’s your trading plan.

  • Good traders have trading plans, so that they know exactly what they will do as they see opportunities in the market. This reduces the fear and doubt that can unsettle most traders and it heads off the panic that destroys more than a few.

  • Failing to manage risk. Even traders who stick with it have many losing trades. That’s why they have risk management systems in place. Their trading plans include stops, which automatically execute buy or sell orders when securities reach predetermined levels. They also have a money management system so that they risk their capital appropriately.

    If you’re going to day trade, use the protection offered by stops and sound money management. Don’t risk money you can’t afford to lose, and plan for the risks that you take.

  • Not committing the time and money to do it right. Day trading isn’t something you can squeeze into an hour a day as a hobby. To do well, you need to set regular hours and have enough money to generate reasonable returns without unreasonable risks. If you have days of losses, a small account will quickly end up with too little money to meet minimum order sizes.

    On the upside, a 1 percent return on $1,000 is equal to $10, and a 1 percent return on $100,000 is $1,000. If you have more money to begin with, the dollars you make from day trading will seem more real to you.

    Canada doesn’t have rules on how much money you need to day trade, but brokers often require a trader to have a minimum amount of dough in their account to get started. It depends on what you plan to trade, but it can range between $1,000 for stocks and $25,000 for options.

    Some Canadian brokers follow the U.S. Securities and Exchange Commission rules that define “pattern day traders” based on their trading activity and as customers with $25,000 in their accounts. In any case, if you have $25,000 you can afford to lose you’re more likely to be a successful day trader than if you have only $2,500.