As much as 95 per cent of day traders lose money in the market, it demands an investigation.
Intraday trading is the most popular, yet data suggests that most intraday traders lose money. A 70 percent don’t last beyond the first year, and 95 percent stop trading by the third year. The number seems pretty high, right? So, what’s going on? Why such a high percentage of traders lose money in day trading? Let’s investigate, alright?
Trading isn’t easy. It takes time and a lot of practice to perfect. And, in day trading, mistakes are costly and result in huge financial losses.
Let’s look at the 7 main reasons for failure.
Lack Of Discipline
The most common reason for failure in trading is the lack of discipline. Most traders trade without a proper strategic approach to the market. Successful trading depends on three practices. First, investors need a guidebook/mentor/course to help or guide them in daily trading.
Secondly, never forgetting stop loss. Don’t enter a trade without placing a stop loss. It will help you to keep losses at a manageable level.
And thirdly, you should have a focus. And in intraday, it is to protect your capital and minimise losses. Without discipline, your chances to become a successful day trader are slim.
Not Adding A Capital Limit
Experts always suggest that investors must deploy separate stop-loss limits for every trade they conduct. Setting a limit for the maximum loss for different trade will prevent capital bleeding in day trading.
If the loss occurs during the first hour of the trade, the thumb rule suggest that you stop trading for the day, reassess your strategy, and come back the next day.
Trading Against The Trend
Sometimes it pays off for long-term investors to trade against the trend as they have more time to assess the market and predict an emerging trend. But for day traders, the best bet is to trade along with the market momentum. In most cases, day traders rely on automating the trading process using trading software because they need to react quickly to profit opportunities. If you’d like to succeed in day trading, gradually master the art to read the charts to time the market.
Hitting The Panic Button
Intraday traders have very little time to react to the market. So, many of them often hit the panic button too early when the market is choppy. It is a common trait, especially with new traders. Remember, when you panic and sell, you compromise your profit potential, which benefits traders who don’t panic. Day trading requires a certain amount of courage and risk appetite to digest market volatility.
The key is to observe the market and not to panic when the market is volatile.
Trying To Cover The Loss
When faced with a loss, day traders try to recover or average out their position in a hurry.
When you face a loss, it means that the trade was wrong. Traders often overtrade to cover for the loss, which increases the risk level.
Losses are part of trading, and when it happens, you need to take time out to analyse what went wrong. The earlier you accept and process the loss, the better you can avoid making more costly mistakes.
Relying On External Tips
Day traders face a challenge with how to trade and which stocks to select. They often rely on external trading tips to base their trading decision. It is a costly mistake that you must avoid at all cost.
Your stockbroker will provide you with trading tips. Besides, there are charts for technical analysis to follow the market. As a day trader, you must always avoid the herd mentality and jumping the bandwagon. It may take you time to read the charts successfully, but it will only pay off in the end.
If you want to master technical trading, Smart Moneyoffers thorough trading and investment courses that suit all types of trader personalities.
Not Taking Note
Ideally, day traders should note down all the trades – details, justification, strategy, profit/loss, and the reasons behind the outcome to review at the end of the trading day. This will work as a ready reckoner in the future. It is a small step that separates successful traders from others. Setting up a good feedback loop is essential for the self-learning process.
Now we have discussed the most common mistakes that day traders make, let’s look at some additional causes, which more often is the outcome of collective action than individual shortfalls.
For example, when a stock price moves upward, more traders buy the stock without understanding the reason behind the rise in demand, hoping that more people will buy after them to drive the price even upward. When everybody participates, the market reaches an extreme, to a point when there is no more buyer left. The result is mass loss.
Another factor is social influence. Stock picking is a critical part of trading, and for most traders, the struggle is real. Successful traders find an asset or strategy that works for them and stick to it without allowing others to pull them away from that. Unsuccessful traders get swayed easily by the crowd sentiment. They often form their idea based on that what others are thinking, without a background search.
As humans, we are prone to availability bias, which prompts us to follow a popular idea. But in the case of trading, individual analyses matters the most. Remember, a market trend results from crowd participation, and it reverses when everybody gets involved.
In the market, not everyone can win. So, only a handful of traders are successful in the market.
Looses are part of trading. Despite best efforts, investors sometimes have to face loss in a trade. The best way is to accept the loss rather than brush it aside and come back with a better strategy.
