The potential for a large amount of profits in a short time period makes day trading an appealing profession (and sometimes even hobby) for many individuals. While the concept may sound simple, in reality it takes careful research, thoughtful strategy, and often a few months of experience to truly succeed as a day trader.
It’s easy to get caught up in the excitement of making quick moves on the market, which means it’s also easy to make mistakes that cost you big—literally.
Familiarize yourself with the most common day trading missteps, so you can avoid making them and maximize your trading dollars.
1) Trading without a plan.
Day trading is not gambling, which means you can’t stake your money on chance. Day trading is about making quick, calculated moves that will minimize your risk of and loss maximize your potential for profit. That’s why rule number one for succeeding in the industry is to come up with a plan and stick to it. Take the time to educate yourself on trading strategy and research market patterns, and use that information to develop a plan. When you commit to a plan, your emotions are less likely to take over and lead you astray in the heat of a trade.
2) Averaging down.
As we mentioned earlier, day trading is all about quick movements rather than long-term investments. The goal is to enter good trades swiftly and exit bad ones even faster. Digging yourself deeper into what should be just a small loss can be detrimental to your enterprise. Holding a losing position for any reason costs time, money, and effort on your part—three things you can’t afford to waste in day trading.
3) Risking too much on one trade.
While experienced day traders can sometimes make this mistake in a moment of fearlessness, risking more than you can afford on one position is a mishap more common to new traders. Particularly when you’re just starting out, you want to stick to trading smaller positions (think 100 shares or less). Risking more than you can afford to lose can destroy your day trading business in the blink of an eye. Protect your capital now to give yourself more cushion for future losses. You’ll be able to bet bigger as your knowledge, experience, and assets grow.
4) Chasing hot trades.
Day traders should concentrate on fixed and reliable returns. If you spend your time chasing the hottest stocks hoping to come out with a win, you’re more likely to panic sell or buy and end up losing. Stocks with this kind of high momentum are more volatile on the market and typically end up stalling, then falling—and you don’t want your money going along for that ride.
5) Failure to cut losses quickly.
Desperately holding onto losing positions is a very common day trading mistake that is, more often than not, based in emotion. Unfortunately, it’s also a mistake that can quickly destroy your enterprise. Holding onto false hope for a turnaround or being afraid to admit you were wrong is understandably human, but comes with a high cost in terms of capital. Again, trading is not investing. As a day trader, you need to get out of a loss quickly for the sake of your profits.
6) Not coming up with a trader tax strategy.
After a year spent navigating the market and honing your trading skills for the most profit, you don’t want to lose more than you have to when it comes time to file your taxes. The fast-paced nature of trading leaves you with a lot on your plate, making it easy to overlook deductions and credits in a rush to get your taxes done and turn your attention back to the market. The solution? Trader tax services from Trader’s Accounting!
Our tax professionals can provide you with everything you need to focus on trading confidently, knowing the other details of your business are being handled expertly. Enlist our day trading specialists for help planning your tax strategy, navigating the confusing aspects of filing as a day trader, and even to prepare the paperwork for you when the time comes. We can also provide bookkeeping services, business entity formation, and more to help you build and preserve your trading wealth.
Contact Trader’s Accounting today to learn more about how we can help you succeed in day trading!