There are some major day trading mistakes that just about every new trader will make early on in their career.  The ones who survive are those who can recognize these mistakes and take corrective action.

The first mistake many day traders make is to skip the planning phase of the day or a trade.  Every day you sit down in front of your monitors you should have a general plan for the day.  You should understand the major trends and support/resistance of the major indices, and the stocks you plan on trading.  In addition to that, once you see your stock setting up for a trade you should have a plan that includes an entry, a target and a stop-loss before you even pull the trigger on the trade.

Another mistake that we often see in day trading is the inability to exit on a losing trade.  If you have issues with getting out of the market when your pre-planned loss has been hit on your own, try using stop-loss orders.  Never. Never ever ever move a stop loss order once it’s been placed.  This requires some discipline but it will save you tons of money in the long run.  You should never be hoping that your stock will turn around, and go where you expected.  You should be executing your plan to the letter.

On a similar note, you also never want to move your targets.  If you keep moving your target away from the stock’s current price, you’re never going to take your profits.  A typical day trading exit strategy is to take profits at predetermined levels as you proceed into green territory.  This means that before you’ve entered the trade you’ve chosen two or more targets.  You exit a portion of your trade at each target.  Now, if you think your stock is going to trend for the day, you can plan for that too.  This is called a trade-to-hold.  It doesn’t mean you move your target, but rather you try to stay in the trend by setting a trailing stop.  A trailing stop can either be automatically set at a certain percentage or point value behind the stock price, or you can mechanically keep moving your stop loss up to obvious points of resistance or support behind your trending stock.

Here’s another common day trading mistake; not waiting for your planned trade to play out.  Many traders get antsy about taking their profits as quickly as possible.  This can sometimes be exacerbated by a losing trade, because the tendency is to want to break even.  After you’ve lost some money, but finally hit a winning trade, people want to grab that profit as soon as they hit zero again.  This is pretty foolish, because you’ll never make any money if you’re aiming for $0.  Another reason we see people leaving the market early is that their stock stalls between their entry and their target.  If the price doesn’t just run in a perfect trend to their pre-planned exit point, they start to rationalize an early exit by projecting their fears onto the market.  The market doesn’t care about your fears though, and your logic was sound.  Let the trade play out as planned, and you will profit in the long run.

Finally, a common mistake, even amongst veteran traders, is the need to be in the market, whether or not there’s a trade.  This is called over trading.  If you start rationalizing entries and trades on paper thin logic, you are probably over trading.  If the market is flat, or whip sawing, and you have money in the market, you’re probably over trading.  If you find yourself pulling the trigger on trades that you almost immediately regret, again, you’re probably over trading.  If this sounds like you, try simply pulling your hand off of the mouse.  Sometimes when you’re scanning the market with that finger right on the trigger, it’s difficult to resist that entry, but if you can recognize a trendless day, simply spend the day as a passive observer.  Watch the SPY, or some other general market indicator, or play around on Stocktwits, but there are just some days that you just shouldn’t trade at all.

This is only a few of the mistakes in day trading.  People can lose thousands upon thousand of dollars trying to learn how to day trade for many more reasons than I’ve listed here.  The day trading success rate is low because road to success is full of pitfalls.  As stated previously, the ability to recognize and correct your mistakes will determine whether or not you succeed in the long run.

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If you’re short Amazon (AMZN), raise your hand and Tommy will come over and hit you on the head with a tack hammer.

There was no end to the stream of people getting killed trying to short this stock.  I’ll admit, this was one of the stocks that I talked about day trading yesterday. I tried to short it Friday morning after earnings and a huge gap up, but I quickly turned it around for a 3 point gain.  There was no way I was touching a short today.

There is NO reason to be short this stock right now.  It is in uncharted territory which means there’s no support or resistance to bounce off of.  We have no way to gauge how people will react as this stock runs because there’s no history.  At no point today did Amazon (AMZN) even feign weakness.  I don’t understand why the $AMZN stream on Stocktwits had so much talk about shorting this stock.

I agree that this stock is way overbought at the moment.  It will probably come down soon, but picking tops/bottoms is one of the worst trading strategies in the market.  Generally if you really have to try to pick tops/bottoms you should wait for a reversal pattern to emerge before entering a trade; Amazon (AMZN) showed none.  If you can find any, please share them in a comment.

Amazon (AMZN) doesn’t care what you think it should do.  This stock will tell you where it’s going to go when it feels like it.  Stop trying to force your beliefs on the stock market.  It doesn’t care and it will crush you.

If you’re holding a short position and it works out, you got lucky.  And lucky trades are bad trades.  I’ll take a good loss over a bad trade any day.

I like to rant on this subject frequently so here are some related articles:

• “The Market Doesn’t Give a Shit About You” – I describe what you can and can’t control when you trade
• “Thinking Instead of Trading?” – I describe a major missed trade in AIG because I sat  around waiting to short it rather than going long (Sound familiar AMZN bears?)

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Day Trading Mistakes Happen.  Get Over Them and Move On

Have you ever seen the movie Groundhog Day?  It stars Bill Murray as a disgruntled weatherman who’s pissed about his assignment to cover the events surrounding Groundhog Day in Punxsutawney.  Due to a blizzard after the events he is forced to spend the night in this town that he loathes.  He wakes up the next morning to find himself reliving Groundhog Day again.  This happens repeatedly until he straightens his priorities and gets his co-star (Andie MacDowell) into bed.

Groundhog Day came in October for Me

Bill Murray spends the first few days reliving February 2nd in utter confusion.  He allows the events to repeat themselves almost exactly as they had the last day with little deviation from his routine.

This is how I felt last week.  3 days last week I attempted to short strong stocks in the morning.  3 times last week I was spanked by the market and found myself losing 2/3 of my daily risk early on.  And each time, despite having recognized that similar events had unfolded the previous day, I simply sat there confused that patterns that normally work out for me were failing.

Making Quick Adjustments

I did make the adjustment each day and got long for some reasonably good results, but my overall results for those 3 days might have been doubled had I not continued to make these mistakes each morning.

Learning From the Mistakes

Bill was stuck in Groundhog Day for long enough to learn piano, chainsaw ice sculpting and just about everything about everyone in town.  This must have taken “years” of being stuck repeating this same day.  It wasn’t until he had constructed the perfect day that he was allowed to proceed to February 3rd.

Hopefully it won’t take me as long to learn from my mistakes.  At the end of each day, I recognized what I was doing wrong.  I was repeatedly attempting to short stocks that screamed “Don’t short me!”  They were strong stocks with big news and lots of momentum.  Next week, I’d like to forget the losses but remember the lessons learned; that way I can progress to the next “day” in my trading career.

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What do you do once you’ve entered a trade? Do you already know where you’ll exit, be it a win or a loss, or do you just meander along until you feel like exiting? Or, even worse, do you sit there and agonize over every single move in your stock; exiting too early or too late and losing loads of money along the way?

Micromanaging Your Trades

You’re bleeding cash.  You watch every twitch and wiggle of the price and each move causes you a little more anxiety.  You rationalize exiting early or a little too late and each time you either lose money flat-out or you don’t profit where you should have.  You’ve spent countless hours developing your trading and still you don’t trust yourself.

Anne-Marie (of AnneMarieTrades.com) recently addressed this issue in her article “No One Likes a Micromanager Trader.” In her article she pinpoints the root of this issue:

Why do we micromanage our trades? The answer is simple: Fear and greed… It is reactionary behavior based on the impulsive fear of loss [or] potential for gain.

This is absolutely true.  On a primal level we love our money.  We want to protect it when we can, and we want to grab handfuls of it when the opportunity presents itself.  The problem with primal thought is that it gives little regard for the long-term.  It wants results NOW.  It doesn’t care if we’ve spent hours of our lives honing our trading skills.  It doesn’t care that a bad day, week or month does not mean we can not provide for ourselves or our families.  It doesn’t understand that we will prevail in the long-run.

Ways to Overcome Primal Thinking

Anne-Marie provides a few solutions to this problem in her article:

How in the world do we break a cycle of reactions based on fear and greed?…We achieve this with training. You can work on training yourself, find a mentor who might take you on, or you could hire a coach. Training creates discipline, discipline creates routine, and routine creates habit.

Again, this is true.  We can break this cycle with training.  I presume by “mentor” she means someone that will do this for free.  The likelyhood of finding someone who will do this for free is slim-to-none.  Unless you are related to this mentor, people who have broken these habits have better things to do when the market is open than break your bad habits.  They are probably out on a yacht somewhere drinking expensive scotch and making fistfuls of cash.

As for hiring a coach; these people come at a pretty hefty price.  If you are looking to pay someone  $1000/day to cuff you in the back of the head every time you do something stupid, my email address is on my “About” page.  I have some spare time and I’m always up for smacking the shit out of someone for being an idiot.  The first slap will come knuckle-first in reaction to you having hired someone to tell you what you’re doing wrong.  You know what you’re doing wrong.  You can overcome this on your own.

Using Advanced Orders for Trade Management

One of the tactics I’ve used to overcome this primal thinking is the use of advanced order types.  One of these advanced orders that I find addresses this issue is called the OT/OCA, or more commonly, a bracket order.  This combines the following two conditional orders:

• OTT (One Triggers Two) – When the first order is filled, two more orders are entered.  These two new orders both act as OCA orders for each other.
• OCA (One Cancels Another) – When one order is filled, the other order is canceled.

This allows you to enter the trade manually, and then your carefully crafted plan executes automatically.  I like this approach because I don’t do purely systematic technical trading.  I prefer to watch my stock’s chart and tape, and enter using my own discretion.  From there, though, my plan is set and I’ve found it easier to let it roll without second guessing myself.

As I said above, you’ve put a lot of time and effort into creating a trading strategy that works for you.  So let that system do exactly that – work for you.  When you start second-guessing your strategy you are working against it.  Utilize advanced order types and trade management to get the most out of your trading without completely handing the reigns over to a computer.

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The market doesn’t care if you’re a bear or a bull. It doesn’t care if you think it’s oversold or undervalued. It doesn’t care about your fundamental analysis or your charting skills. The market will do what the market will do, with or without you. You are not in control.

Accept It

One of the worst things you can do is a trader is to start to feel like you’ve lost control of the market.  You should never feel that way because you never had control in the first place.  You can have all the indicators in the world telling you to buy only to enter the trade and have it immediately go against you.  Accept it, you are not in control.

Ego

Sometimes you let your ego get the best of you.  It happens to the best of us.  You make a few great trades and you feel like you’re running the market.  Inevitably, though, the market will give you a brutal lesson in humility.  It is up to you whether or not you get your ego back in check and persevere.  Always remember, you are not in control.

What Can You Control?

The only thing you can control is yourself. You can not control the market, but more importantly, the market can not control you. Only you control when you enter and exit the market.

Entry

You control your entry. The market can not pull you into a trade. As much as it seems like a stock is screaming at you to make a trade, it can not pull the trigger for you. You enter when your predetermined entry criteria have been met, not when the market tells you to. Now, you are in control.

Exit

You know the saying “plan the trade and trade the plan,” and that includes a planned exit on a failed trade.  You have spent countless hours honing your trading skills.  You know the set-ups you are looking for and you enter trades based on these set-ups.  If that set-up fails, you have to punch the eject button.  You take the loss and you move on.  Losing is a part of trading; accept it.  Once again, you are in control.

The market doesn’t give a shit about you.  It will exist whether or not you do.  On the other hand, as a trader, without the market you are nothing.  You are essentially a parasite and the market is your gracious host.  A host organism will learn to fight off and destroy harmful parasites, but it will allow useful ones to coexist.  Learn to accept what you can and can’t control and harmonize with your host and you will have a long and happy life of day trading.

PR: wait… I: wait… L: wait… LD: wait… I: wait… wait… Rank: wait… Traffic: wait… Price: wait… C: wait…

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Contrary to popular belief, day trading is all about losing.  Winning is great, but it’s how you deal with the losses that will define you as a trader.  If you can learn from every trade, win or lose, I can almost guarantee you will succeed in your trading endevours.

Better Trades

The first thing you should focus on is making better trades.  Hold the winners longer, and cut the losers quicker. This approach will ensure that you become profitable long before you get your win/loss ratio positive.  Even with a low risk/reward ratio of 1/2, you can lose twice as many times as you win and still break even.  If your risk reward is 1/5 you can be a HUGE loser and still make money.  Check out the following example using the 1/5 risk/reward ratio;

• Trade 1 – $100 loss
• Trade 2 – $100 loss
• Trade 3 – $500 win
• Trade 4 – $100 loss
• Trade 5 – $500 win
• Trade 6 – $100 loss
• Trade 7 – $100 loss
• Trade 8 – $100 loss
• Trade 9 – $100 loss
• Trade  10 – $100 loss

Look at all those losses.  If you add it up though, you’re still ahead $200!  This is why traders focus on trading better first, and winning more often second.

Be the Best Loser You Can Be

Here are a couple of steps to be a better loser;

1. Cut Losses Early – You can’t control which way a trade goes once you enter. You can, however, control when you get out. This goes back to the point above about making better trades. Improve your entries & exits, and hone your trading skills, and the wins will follow.
2. Keep a Trade Log or Journal – You need to analyze every trade you make.  Keep a pad and pen (old school) by your computer when you’re trading.  You should write down your entry & exit criteria as well as anything else noteworthy before you forget.  After the market closes, go back and flesh out those quick notes with some deeper thoughts and analysis about the trade.

Redefine

It really boils down to redefining what “losing” means to you as a trader. A losing trade is one you don’t learn from. Whether a trade is a win or a loss, you should always take something from the experience in order to improve as a trader. If you don’t, the trade is a loss even if you’ve made money.

Losing is a part of trading, so get used to it. Embrace your inner loser. And with that, I leave you with the greatest loser anthem of all time.

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Day trading requires patience. One of the only things better than really nailing a trade is the satisfying sound of the ball cracking into the back of the plexiglass of an indoor soccer goal. I am not a prolific goal scorer, but I recently scored a goal that was hailed as the “Goal of the Match” in a 5-1 win. What made this goal so perfect is the same thing that is often responsible for my best trades – patience. So picture this; the field is about the size of a hockey rink, complete with wooden sideboards.  The opposing team has just attempted to score, but now my keeper has the ball.  I notice the other team’s defense has pushed up towards us a little too far, so I take off straight up the center of the field.  We know we could catch the defense on their heels here, but it hasn’t panned out quite yet.  My keeper sees me, but he’s keeping his options open. At the trading desk, this is a lot like spotting a potential set-up.  You see a stock starting to form a familiar set-up, but it’s not quite time to make a decision.  You have an eye on it, but you’re not ready to pick an entry.  You are probably still watching other stocks here. Back on the field, I notice that the defense has been caught off guard by this counter-attack.  I hear the familiar “JAY!” from my keeper, signaling me to look over my shoulder, because the ball is coming my way. Your stock has completed its set-up here.  Perhaps it’s bumping against resistance or support levels you’ve identified, perhaps it’s a familiar pattern that you trade like the wedge or head & shoulders.  Whatever it is, it’s time to focus and pick your entry. The ball sails over my shoulder and lands near my feet taking a perfect bounce.  I have left the defense in the dust and it’s just me and their keeper.  He is headed towards me, trying to cut off my angles.  I could take a shot here with my right foot (my “good” foot) but the keeper is positioned well.  He could spring in either direction and block my shot. This is where patience really kicks in.  The itch in that right leg was similar to the itchy trigger finger you might feel when a trade is really close to breaking out.  You want to get in, because you don’t want to miss the party, but the trade hasn’t given you the signal to enter.  It’s this point where you really need to be in the zone. The ball takes a second bounce.  The keeper knows I am more likely to go to my right, so he commits to my right.  I see the opening and I take a one-touch swipe at the ball with my left foot. You’ve been watching your stock bump up against your entry point.  You may have even noticed it fake-out a penny or two.  But a sharp eye sees the real resistance still sitting there.  Finally the resistance lifts and the real breakout occurs. The ball cracks, uncontested, into the back of the goal. You’ve entered your order, get a fill, and you’re almost instantly in the money.  Your target is quickly reached and you exit with your profits. This may have taken you several minutes to read, but these are the types of thoughts that should flow through your mind in a matter of seconds.  This  level of “in-the-zone” information processing can not be taught, it can only be gained with experience. There are two levels of patience displayed here.  The first is the patience to learn the ability to process this information.  This will generally take hours and hours of desk time.  During this learning phase, your position size should be small, and you should be training yourself to focus on the trade & not on profits or losses or whatever people may be chattering about on the net. The second level of patience comes in that split-second decision making.  The difference between pulling the trigger at the right moment instead of right now can mean the difference between getting shaken out of a trade early and riding it to your target.

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Yesterday, AIG was a day trader’s dream. It rocketed up 9 points, and gave multiple entry signals all the way up. And did I make any money on it? No. Not one cent. Why? One thought kept me out of this trade.

It Can’t Keep Going Up

You’re damned right it can. And I know this. I’ve seen this, while day trading, a thousand times. A stock just shoots up out of nowhere. You feel the slight hum of the masses as they start to talk so you decide to take a look at the chart. There it is. The stock is making gains that no one was expecting. I don’t tend to chase others’ picks once the trading day begins.  My watch list is locked in, and I’m concentrating on my chosen victims.  But the buzz on Stocktwits was undeniable.  Something was happening with AIG.  So I took a look as it broke 14 and took off.  And I thought ‘Well, I missed the entry.  How high can it go?’ Turns out, a lot. As I continued about my trading of other stocks, unphased by the missed entry on AIG, the buzz on Stocktwits became a roar.  Everyone was chirping about AIG.  I kept looking at the chart every time someone called a new high and every time I thought ‘It can’t keep going up.’ Wrong.  Absolutely wrong.

What Happened?

I allowed myself to think instead of trade.  You may be thinking ‘Doesn’t trading require one to think?  Like, a lot?’ And you’re right. It does.  In the beginning. But eventually, trading becomes very instinctual.  You gain the ability to process massive amounts of information and enter & exit trades all in the periphery of your mind, like a Japanese dude catching an arrow. And I should have recognized the pattern here.  It was nothing new.  As a matter of fact, it was absolutely textbook.  It was such a perfect example of how to play the bull flag pattern that you should expect to see the chart in a future post regarding the subject. For an example of how this should have been traded, just look at Chart Addict over at iBankCoin.com.  He’s a great technical analyst and he nailed it. In the end, I’ve learned from this experience; don’t let thinking get in the way of trading. This could have been a monster trade. It’s a trade that I was made aware of right at the start, and several times thereafter. And the shark in me wanted to take a bite, but I let that “It can’t go any higher” mentality get to me. Luckily, this didn’t really affect my trading day. It was just another missed opportunity on the stock market. I used to get very frustrated by these misses, but now I just kind of laugh and enjoy others’ good fortune for catching it. After a while, you realize that these things happen rather frequently, and chances are, you’ll get to be a part of one of these trades some day, and it will make your month or your year.

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I have recently taken up poker at the insistence of my friends. My friends range in skill level from beginner to the guy who takes thousands of dollars from the old dogs at the local underground poker ring that may or may not exist depending on who’s asking. Like most traders, they are very generous with their knowledge and willing to teach newcomers. This is probably partially motivated by the fact that they can bleed me dry until I learn…

Anyway, though the learning process I’ve noticed that the poker player and the day trader share some very similar qualities and it has lead me to believe that poker players may make very good day traders.

1. Patience

I have noticed that the better players at the table are willing to grind it out. For hours. Many many hours. Long after I’ve gone “all in” on the intention of getting out of the game to concentrate on drinking, they’re sitting their strategically picking each other apart, holding out for good cards, and waiting for the perfect moment to strike. This is similar to day trading in that you must often sit for hours sifting through your watch list, feeling out the mood of the market, and striking at precisely the right moment.

2. The Ability to Process Loads of Information

In order to know when that precise moment to strike comes along, both the day trader and the poker player must process loads of information. The poker player must be able to not only calculate odds with every card drawn, but they must be able to react to behavioral patterns in their opponents. The ability to read when someone might be bluffing is very valuable. Why do you think they wear those goofy hats and sunglasses?

A day trader must also be able to take in tons of information. You have to be able to read the market, read your stock, know key levels in both, follow some news, and when preparing for a trade you’re usually watching every single trade go through on the tape in order to decide when to make your move.

3. They Sometimes Pay for This Information

When day trading you might have to pay for some of this information. Sometimes it is necesseary to get into and out of a position to feel out how a stock is trading. I have noticed that poker players will make similar moves when trying to feel out how opponents react in certain situations. I have seen them go entire hands with terrible cards simply because they felt someone at the table was behaving strangely and they wanted to find out why.

4. Disciplined Money Management

Even when poker players are “paying for information” they already have a maximum amount they are willing to spend in such a situation. They also know how much they are willing to lose on any given hand, and bet accordingly. They have to adjust according to what is played on the table as the hand unfolds and react to how others are playing the hand. Similarly, day traders need to adjust their position sizes, stop losses, and targets based on how the stock is acting, and how the general market is behaving.

Neither the day trader nor the poker player should enter the market or sit at a table without knowing how much they are willing to lose for each trade or hand, as well for the entire duration of the game or trading day. Strict money management is what keeps us all in the game, and what allows us to walk away and to play again another day.

5. Tolerance for Loss

In accordance with their money management strategy, poker players & day traders are able to psychologically deal with the losses their strategy allows. As new as I am to poker, I am able to tap into the psychology that I know plagues people after they lose, in order to beef up my own bank roll. An iron-skinned business-like approach to losses is a trait that I’ve noticed between skilled poker players, and day traders alike.

In Conclusion

I have to say that poker players probably make awesome day traders. In other words, Annie Duke can come sit at my trading desk any day.

I apologize if I haven’t accurately captured the feeling of a poker player. As I said, I’m new to poker, and these are just the initial impressions of a semi-inebriated casual observer.

Has anyone else noticed these similarities? Maybe you can think of some more? Perhaps you know of some distinct differences that show that a poker player would make a terrible day trader. Let us know by leaving a comment!

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You can’t win if you’re just trying to break even.

When day trading, have you ever taken profits sooner than you should because it made up for your losses the previous day?  Have you ever increased your position size or the amount of risk you take on “temporarily” just to get back to zero?  Yeah?  Me too.

What is Break Even Mentality?

Break Even mentality is that itch in the back of your brain that tells you “If you can just break even on this trade, then you’re back at zero.  It’s a fresh start.” It could cause you to exit a trade early only to watch the stock market carry that price right to your usual target.  It might cause you to increase your position size so a smaller trade will get you to back to even.  It might make you to take higher risk/higher potential profit trades hoping that the big payoff will get you back to zero.  Then you’ve reset.  You can start over from there.

How Can Break Even Mentality Affect Your Trading?

The truth is that you can’t restart from zero.  Even if your break-even strategy works, you’ve now trained yourself to feel rewarded by bad trading.  You’ve set yourself up for inevitable failure because these poor habits will never work in the long run.

What Can You Do About Break Even Mentality?

If you feel yourself getting into the break-even mindset, you need to take a step back from trading for a moment.  You have to take a look at why you feel this way.  Do you always follow a losing trade with a break-even style trade to make yourself feel better about the loss?  Or maybe you try to make up for a losing day on the following day, or a losing week on a Monday.  Whatever it is, you need to think about the big picture.  Your goal as a trader is to stay in the game, and remain profitable in the long run.

After a big loss, or a series of losses, you should reduce your risk and position size.  It may take longer to get back to zero, but that restraint and discipline will make you a better trader and increase the amount you can take from the stock market in the future.

Examine your trades.  You should be keeping a trading journal and dissecting your trades daily.  Learn to look at your trades in the mindset of what you did right and wrong, not whether it was a win or loss.  Try to train yourself to feel satisfied with a loss because it was executed perfectly.  Try not to think of the money lost.

This one is a bit more difficult, but try to restrain positive feelings from a winning trade that you know was traded poorly.  Instead, figure out why it was a poor trade, and try to take corrective action to prevent yourself from trading poorly in the future.  If you don’t, you may have won that battle, but you will lose the war.

It’s not the wins, but rather how you deal with the losses that will determine whether or not you succeed in the stock market.

Have you ever caught yourself trying to break even?  If so, let us know how you felt & maybe how you learned to get over that type of behavior.

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