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Are you toying with the idea of raising capital for your business by executing a few quick day trades? If you are, keep in mind that when you’re a novice day trader, it’s easy to make mistakes.
That’s because, when you buy and sell securities quickly and hold your positions for short periods, there is a lot that can go wrong. As a matter of fact, the day trader who is new to the game can even grow accustomed to watching his or her investment capital evaporate quickly.
Whether it’s binary options trading or forex day trading, there are a number of common pitfalls and traps just waiting for a day trader to fall into. Maybe it’s that you have no strategy or plan, or you haven’t done your homework about the markets. Whatever the cause, nearly everyone is at a risk of being caught out one time or another.
Here, we discuss some of the more common blunders almost every new day trader has made.
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A Lack of a Trading Plan
Do you know your precise entry and exit points? Are you aware of how much capital you are willing to invest and to trade? How much is the maximum you are willing to lose? If you cannot answer these questions, then you have already made a big mistake. Failing to prepare is preparing to fail. Therefore, ensure that you enter trading with a solid plan, first and foremost.
Not Knowing When to Move On
Call it stubbornness or call it inexperience. Regardless of which tag you affix to this principle, the consequences are the same. If a day trader does not know how to take a loss and move on to another trade, they will potentially hold onto a losing position. Things can get worse with time. Mounting losses can build up and eat considerably into your capital.
Neglecting the Importance of Stop-Loss Orders
There is no doubt about it: stop-loss orders are incredibly important to being a successful day trader. Without recognizing the importance of stop-loss orders, a trader runs the risk of losses becoming unnecessarily large. This is Trading 101 stuff. There are reasons why successful traders abide by golden rules such as stop-loss orders. These can be defined as part of your trading strategy.
While it may seem tempting to rush into trades like Genghis Khan off the back of successful trades, logic dictates that this is a bad idea. Over-trading may soon see your profits dry up significantly. What’s more, you could then face considerable losses. Novice traders may think they are onto something once they’ve made a big win. However, pretty soon you’ll start to understand the reasons why those with more experience are careful to subdue their enthusiasm for trading, especially when they’ve experienced a winning streak.
Following the Herd
Following the herd is generally a bad idea. Not only does it lead to laziness, but it can also prevent a day trader from paying close attention to their own trades. In the excitement of the moment, they can fail to exit when they get crowded.
The smart money will move out quickly. But novice traders won’t be experienced enough to know when this has happened. Conservatism is something which the new day trader generally needs to learn. And they do so by watching more savvy traders.
Trading is far from a sure thing. As such, it is important to give yourself as much of an advantage as possible when you’re trading. If there are no easy ways, make things as easy on yourself as you can. Preparing for the worst is always a good place to start. However, it is the comprehensive building of knowledge which is key to being a successful day trader.