Day trading represents one of the best approaches when markets are volatile. With uncertainties in the longer-run, traders prefer to place trades that are generally closed in less than a day. However, only a small percentage of retail traders manage to consistently generate returns and that happens because they keep making several mistakes repeatedly.

Alt-text: trading mistakes

#1 Overtrading

Retail traders consider that day trading does not have a cap on the number of trades opened during the span of a day. They end up overtrading and thus diminishing their alpha. For a beginner, 2-3 trades/day could be too much. The main reason for that is their inability to monitor many assets at the same time. Since they can only analyze not more than a few different assets, the number of trading opportunities will be small.

There’s no point in opening a trade, as long as the rules of the trading strategy are not being met. An increase in the number of trades does not necessarily equal an increase in profitability. Traders that overtrade have a lower accuracy which makes this approach working against their interests.

#2 Emotional trading

Financial education is not a priority for people around the world, not just for traders. Few people know that having an emotional reaction towards money is not a good thing. Even though brokers such as easyMarkets and others provide learning resources for newbies, it’s common to see traders being hijacked by their emotions constantly. Operating objectively is not an easy-to-acquire skill and it’s the main reason why most of the traders don’t manage to reach their trading goals. Emotional trading clouds one’s judgment and makes it impossible to stick to a trading plan.

#3 Neglecting risk management

Since not all trades will turn out to be winners, risk management principles must be part of any trader’s regime. They must set what’s the maximum risk per trade, or per day, as well as place stops losses and take profits (if possible) for all market orders. On paper, this is easy to do, but things change when traders find themselves in front of the charts. All risk management rules vanish and they increase their exposure, double the position sizing after a losing trade, even though that’s not consistent with their strategy. Having the discipline to follow strict risk parameters is another skill lacked by retail traders.

#4 Impatience

Get-rich-quick tendencies are normal in a society that promotes overconsumption and sell dreams rather than realistic outcomes. However, when trading the financial markets this habit must disappear, or it will lead to impatience during the trading process. Traders want to make money fast, even though they lack knowledge or enough capital so small returns will represent enough income to make for a living. Financial independence is not something achievable overnight and traders who pursue it, must understand that it could take months or years until trading alone will ensure enough resources to not rely on a job/additional income source. Impatience leads to overtrading, emotional reactions, and eventually the mistake of respecting the trading strategy.