10 Rookie Day Trading Mistakes
to Avoid When You're a Beginner
While it can be a challenge to get hard numbers, it certainly looks like more and more people are turning to investing as a way of making a second income. It's likely that many new investors are trying out day trading strategies in spite of the fact that they have no real experience with financial markets. With NFTs, cryptocurrencies and exchange-traded funds, they'll have no lack of products to invest in.
What they might not have too much of, however, is success. There's an old saying that day trading is a reliable way to lose money, and unfortunately there's some truth to that. Only around 3 percent of all day traders ever turn a profit. You can, however, dramatically improve your chances if you take the opportunity to learn a few new skills and focus your investment dollars on smarter trades.
1. Buying into the Hype
One of the biggest reasons that amateur day traders lose their money is because they buy stocks based on media hype. In today's world, that often means that they hang out on some social networking feed waiting for someone to promote a stock. Take some time to bone up on basic investment principles before you start throwing money at the next big Silicon Valley startup.
2. Throwing Good Money After Bad
Eventually, you might have to cut your losses with a bad trade. Some people, however, constantly try to invest in failing securities at a lower and lower price in the hopes of averaging down. While this is a decent strategy at times, you don't want to throw good money after a bad trade. There's always the possibility that there's another security or virtual currency that could be making you money while you're concerning yourself with a previous trade.
3. Relying on Old Information
New investors often look toward past performance, which is warned against by ubiquitous SEC notices put on almost every piece of investing information issued to consumers. Investors should rely on a variety of news sources, including traditional investment newsletters, stock market analyses and company financial evaluations, to make well-informed investment decisions.
4. Forgetting About Other Investment Products
While the CD market looks dismal these days, that's no reason to forget about other investment products entirely. Consider putting some of your savings into a money market account or something insured by a bank. In today's world, you'll also want to keep your finger on the wide variety of so-called alt-coins that are available. Though people probably use the term Bitcoin and cryptocurrency interchangeably, there are at least a dozen viable cryptocurrencies and an even greater number of those that may not be sound bets.
5. Day Trading Mutual Funds
In most cases, mutual funds take time to appreciate in value. Day trading usually works best with cryptocurrencies and conventional brokerage accounts as opposed to big top-heavy funds. Consider the fact that mutual funds have long been marketed as a good buy for those saving money up for retirement. People in that position certainly don't want to invest in something risky.
6. Investing with Unsettled Funds
The proceeds you create from selling shares of a security are deemed unsettled because the trade can take two extra days after you sell the stock to get finalized. If you reinvest those funds, then you're not supposed to sell the new securities until the initial funds have settled. Proceeds from certain types of day trades can't be used instantaneously and still need at least one day to settle before you can even buy with them.
Say you bought $2,000 of stock on Monday and sold it on Tuesday. If you used any money from the sale of stock, then you have to hold onto it until later in the week once it's settled. Those who sell the stock and buy other securities too quickly might get a 90-day trading restriction placed on any account they have.
7. Confusing Risk with Opportunity
The phrase no risk no reward isn't always right. You don't need to risk a large amount of cash in the stock market or in a cryptocurrency exchange to make money. Set a limit and be sure that you never invest more money than you can afford to lose. Despite the similarities between day trading and gambling, you don't want to treat this as though you're playing casino games. Investment is a way to help people grow the value of securities. It's not poker.
8. Believing Exclusively in Systems
Financial experts have come up with complex trading systems that are designed to make day trading strategies much easier to execute. While these can work at times, there's also the possibility that they're based on bad data. Market forces change over time, which can also make it difficult to predict the performance of any particular strategy. Be sure to remain flexible and study multiple different strategies in order to reduce to risk that you'd end up beholden to only a single way of doing business. Sometimes, good buys come out of nowhere and no system can help you point these out.
9. Getting Involved During Turning Points
A majority of traders who get involved with a specific trend do so at a big turning point. Whenever a security or cryptocurrency is gaining traction, there are a number of people who stay back because they think the price is already overbought. Eventually, many of these people will see that prices are still ticking upwards so they'll buy in. By that point, a whole subsection of the population is bullish and they get left holding the bag. You may want to try buying securities that aren't getting the huge kind of traction as those that might lose you money are.
10. Listening to Stock Promoters
There is such a thing as too much information when investing. An entire industry exists to promote stocks to day traders. Make sure that anybody you follow is trustworthy. Some stock promoters actually follow the rules and state that they're promoting different ticker symbols. On the other hand, there are plenty of those who exist in a legal gray area. Research anyone you take advice from every bit as diligently as you look at the securities you buy into. This alone can help to dramatically reduce the risk that you'll lose more money than you hoped to in your first few months of trading.
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About the Author
Philip Piletic closely follows the impact of technology on education, and its evolution from traditional to modern methods that include e-learning, courses, gamification, and others. He has also helped the Sydney-based IT & Business school in developing their IT courses.