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Why do new traders always lose out to professional traders? What is the extra edge that professional traders have that allow them to always win in the long run against new traders? And why do new traders tend to make the same day trading mistakes?
Back when I was trading professionally in a private equity fund, when I was sitting next to veteran traders with 20, 30 years of experience who were literally moving millions of dollars, I was fortunate to have the chance to observe the way they trade.
And I also got the chance to see many new traders come and go. And to see the kind of trading mistakes that they made.
And I realized that for retail traders, if you want any chance of competing with these professional traders, you need to be able to understand and learn certain key skills and avoid key day trading mistakes that will kill your trading account.
If you would like to learn all the essential elements to kickstart your trading journey, also check out: The Beginner’s Guide to Trading & Technical Analysis
Day Trading Mistake #1 No Solid Trading Plan
The trading plan is the foundation of all your trading endeavors. Imagine once the market is open and prices are moving, the charts are moving, it gets very emotional.
Once the market is open, you should purely be focused on executing your trades. All the time, all the focus and energy should be in the execution.
So even before the market opens, before you even place your first trade, you need to have a solid plan that will tell you:
- What you are going to trade, what is the trading strategy
- What is the trading style, where you’re going to enter your trades?
- Where you are going to exit your trades
- How much you’re going to risk per trade?
All of these are important things that should go into your trading plan.
So the moment the market opens, or the moment you get ready to place a trade, the focus should be on the execution, because you are supposed to be just strictly executing your trading plan.
Day Trading Mistake #2 Lack of Practice
If you think back when you first started to learn how to drive, you did not just go into the car and start driving immediately.
You first had to familiarize with, “what does this button do?” “What does this lever do?’
You actually had to familiarize with the whole process of driving because you cannot be trying to drive on the road, and at the same time, figure out how the different parts of the car works.
The same theory applies to trading.
When the market in session, you want to be focused on executing your trading plan as efficiently as possible, to avoid making any day trading mistakes.
You need to be familiar with, “how do you execute the trade?” “How do you key in the orders?”
You really need to be very familiar with the whole process to be able to do this.
What you should be doing, even before you go into live trading, perhaps like paper trading, virtual trading, such that you get used to the whole process of trading without taking the unnecessary risk of losing your money.
Day Trading Mistake #3 Wrong Psychology
The next common day trading mistake is not having the correct psychology or mindset. There are a lot of different things that can affect you mentally when you are trading.
One of the biggest problem is actually the inability to cut losses. Most of us have this innate loss aversion. It’s one of the cognitive biases that we hate to lose money.
For new traders, the tendency is to not want to cut losses, even though you know that you are wrong.
If you follow your trading plan, it should have a strict stop loss area or price level.
But if you do not follow that, then your losses could really snowball and you end up blowing your trading account.
The second mistake of having a bad psychology is overtrading.
For new traders, they tend to see too many trading opportunities, whereas professional traders zoom in and only take the very best trades.
These new traders, they tend to see every trade as an opportunity, they are afraid of missing out on potential trading opportunities.
Whereas as a professional, you want to deliberately filter out as many bad trades as possible.
That is the kind of mentality of a professional versus an amateur trader.
And another mistake is revenge training, where you’ve already lost, and instead of calling it a day or resting to fight another day, you try to make back the money.
You try to earn back whatever you have lost, and that leads you to make poorer and poorer decisions because it no longer becomes about executing.
Your trading plan becomes “I don’t want to lose but I’m trading because I want to take revenge on the market. To teach it a lesson or to make back the money that I lost.”
So that is a very wrong approach to trading.
Day Trading Mistake #4 Being Too Greedy
The next day trading mistake is not having the correct progression. Just as with all skills in life, you need to learn it in a step by step basis.
Like when you are trying to learn how to swim, you do not jump right into the deep end of the pool.
You start off in the shallow pool and then you slowly progressively move up with the correct technique.
When it comes to trading, most new traders, especially if they start earning a little bit of money, they start to get complacent.
They start to think that, wow, I’m a genius. Everything, every trade I make turns to gold and they start trading more and more aggressively.
They’re thinking, wow, if I can make $50 a day, why not I increase my trading size and now, I can make like $500 a day.
Why not I increase it even more? I can make like $5,000 a day.
So what happens when you keep scaling up more and more?
There was a veteran trader who shared with me, he told me that all it takes is one bad trade.
No matter how good you are, whether you’ve been trading for 10 years, 20 years, 30 years, all it takes is one bad trade that if you break your rules that one bad trade can potentially blow up your whole account.
You hear stories of people making a lot of money, but because of one trade, and they don’t follow their rules, and they end up losing everything.
You must not let the greed control you. You must always be in control.
So with regards to progression, you need to scale up your account size gradually. Do not scale it up too fast.
One recommendation is to always scale it up by 1.5 times. For example, if you are trading a $10,000 account, And you have been consistent for say a month, then you scale it up to maybe a $15,000 account.
When you are consistent for another month, then you scale up by 1.5 times again.
If your consistency drops, you may want to scale back to $10,000 until you regain confidence.
The whole idea is to scale it gradually instead of just arbitrarily multiplying your account.
Day Trading Mistake #5 Lone Wolf Mentality
The last point is to not adopt a “lone wolf” mentality.
Now, maybe because you see it in movies or you hear a lot of stories of people going in as a lone wolf, as a solo top trader who disregards the opinions of everyone.
And they just go in alone, they make a lot of money and they make a lot of enemies.
So I will say that is the lone wolf theory/approach.
But in reality, if you watch nature shows, wolves usually hunt in a pack and that is when they are most effective.
If you are working with a community of traders and if you have a mentor, there’s no need to be selfish, or wanting to be the best or wanting to be better than other people.
If there’s a good trading opportunity, and you share it with other people, it doesn’t mean you earn less.
Everyone can take the same opportunity. And when they have good opportunities, they will share it with you as well.
When we were working as a professional trading team, we share ideas with one another, we work together. Everyone gets more trading ideas.
Another upside of having a community is that you get to learn from each other’s mistakes, so you can avoid making the same day trading mistakes that others have made.
Summary of Day Trading Mistakes
So I’ve just covered the top 5 day trading mistakes that beginners make.
And just to sum it up. The five key points are:
- You need to have a solid trading plan.
- You want to have a lot of practice before you go into live trading.
- You want to adopt the correct trading psychology and mentality.
- You want to scale up your account progressively.
- And lastly, think in terms of abundance.
Do not try to go in as a lone wolf in the markets because the lone wolf gets eaten. Whereas if you hunt in the pack, it’s a lot easier to be profitable in the long run.
Now that I’ve shared the top 5 most common day trading mistakes that beginners make, what were some of the difficulties you faced when you were starting off as a new trader?
Do let me know in the comments below.
Spencer is an avid globetrotter who achieved financial freedom in his 20s, while trading & teaching across 60+ countries. As a former professional trader in private equity and proprietary funds, he has over 15 years of market experience, and has been featured on more than 20 occasions in the media.