If done correctly, by practicing both risk management and overall discipline, day trading can be an effective way to generate extra income, or even exceed your annual salary. Utilizing market structure, keeping losses small, and moving your stop loss upon a winning position with momentum are just three ways to practice risk management as a day trader, but what about the three top mistakes day traders, particularly options traders, make without even knowing it. My fellow options day traders, this next blog is for you.
One troubling fact that I came across about the day trading community; According to Vantage Point Trading, only about 4.5% of day traders consistently succeed! Of course, most of these articles centered around the negative aspects of day trading were written before 2020 (when “BTFD” took on new meaning), but this isn’t 2020 anymore- It’s 2021, under a new administration, and the market is looking forward to a post-covid world. Long in short, we need to adapt. Here at TradePro Academy, we have a successful day trading community that makes this 95% failure rate look like scary folklore, and we believe there are ways to prevent becoming a part of the next article that bashes what we love to do for a living. So without further ado, here are the 3 top mistakes options day traders make and how to fix them.
1. Confirmation Bias & Emotion
Confirmation Bias and emotional trading is the first major mistake on our list for a reason. Yes, we are traders, but first and foremost, we are human, and we have emotions. It’s been proven that taking a loss on a losing trade is more painful than selling a winning position too early (also known as “FOMO”), yet, many day traders tend to cash in their winning position early and hold on to their losing trade/s. Hope & trading are two words that should never be used in the same sentence. We need to trade what we see, and not trade what we wish to see. News, technical analysis, and basic level order flow, although super helpful a lot of the time, can still spark confirmation bias. For example, how many times have you heard a trader say about a losing trade “XYZ should be going up, it had calls and a bullish setup! It got a huge price target to raise just last week!” All of that may be true, and a lot of the time that is enough to tilt the scale in your favor, but there could always be something you missed – maybe the broader indexes are keeping this stock down? Maybe the volume was too low for the setup to follow through? Or maybe, just maybe, you misinterpreted order flow?
Resolution: If you’re feeling emotional, set your own mental stop loss. Reset after a losing day. Take a break and detach from outcomes. Your brain wants that instant gratification dopamine hit, and is in withdrawal. You need to break the mental cycle before trading again. With a clear mind, you’ll revert back to your hard-earned skills – paying attention to levels and volume on charts, keeping losses at a minimum, and sticking to your trading plan.
2. Impulsivity & Lack of Due Diligence
Number two on our list is Impulsivity and Lack of Due Diligence. To traders, it’s obvious why these two go hand in hand. How many of you have heard breaking news, only to impulsively enter that trade, taking the obvious bias position, and for your position to go red within minutes after entering? Sometimes that works, and in TradePro Academy’s order flow course, we have a whole segment on trading the news, along with a ‘trading the news checklist.’ With that being said, many traders will just impulsively enter the trade without doing any due diligence before executing. Believe it or not, smart money always knows the move before you or I do. We may see a stock receiving a lot of retail interest after the news hits, but prior to that news release, big money has had a team of researchers contact that company’s CFO, has had data analysts analyze that company’s numbers, and has had insight on this one single bit of market-moving news for months. Of course, our due diligence will not be at this level, but there is a resolution.
Resolution: Learn to follow smart money. Learning high-level order flow will allow you to see and interpret smart money accumulation in a specific security, as well as an increase in implied volatility (meaning a big move is being priced in, and most likely inevitable). Learn to be in a trade before the move happens! This skill is 90% swing trading, but sometimes we do see smart money accumulation the same day, sometimes minutes before the news hits the wire.
3. Risk Management
Last, but certainly not least, Risk Management. In the trading world, we always hear about the importance of risk management. However, there is still a huge number of traders that don’t practice it. Institutional money’s number one rule is to manage risk. We just saw a large fund (Archegos Capital) collapse recently due to a lack of risk management and being over-leveraged. So if smart money practices risk management, then why aren’t we?
Resolution: Use stop losses! And I understand your hesitation, but hear me out. I never used them either up until recently. I fell into an emotional trading trap and had my first 4-day losing streak in a year. Had I used stop losses, I would have saved a lot of money after falling into a mental trap (see mistake number 1). I used to say I hated being “stopped out” of positions, as I didn’t want to forego potential gains on a trade that had a high potential of being successful. However, referring back to mistake number 1 again, losing trades is far more emotionally painful than FOMO. Why not practice risk management, and risk feeling the pain of FOMO instead of the pain of loss? It’ll be easier on both your portfolio and mental capital. Trust me, you’ll be thanking yourself later.
But that’s not all…
Join TradePro Academy’s live options/stocks room today! With a high community success rate, institutionally trained moderators, and an accountability floor, we do our best to make sure our community doesn’t make the three mistakes outlined in this blog. Go to https://tradeproacademy.com/trading-room/ and click on the live room option today!
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The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO AcademyTM is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.