Both experienced day traders and beginners in search of tips for getting started can benefit from being aware of some of the most common mistakes day traders make. Below are five of the most common day trader mistakes to avoid.
Ignoring Win-Rates and Reward-Risk Ratios
While day trading, it's important to pay close attention to win rates and reward-risk ratios. Maintaining a win rate of more than 50% and a reward-risk ratio of more than 1.25 is a good indication of success. Day traders who consistently fall below these rates yet continue to trade typically find themselves facing substantial loss, so it's important to stay vigilant about these numbers.
Risking Too Much
A good risk management strategy is an important part of day trading. Without one, day traders may find themselves putting up too much capital and losing more than they can afford to. A good rule of thumb is to avoid putting up more than 1% capital on any trade, ensuring the risk is relatively minimal.
Winning is a great feeling for day traders. And just as in gambling, losses can be difficult to face. Often, day traders make the mistake of trying to go all-in on big trades to win back their capital after a day of losses. More often than not, this ends in excessive loss. Instead of chasing losses, it's better to play it safe and take a break before diving back into the market.
Paying Too Much Attention To Stock Market News
Following and anticipating news stories might seem like a good idea, but it's important to remember that things can change in an instant and putting up a ton of capital for a stock based on economic news doesn't always pan out. Instead of following news releases, the best thing to do, especially for beginners, is to diversify trades and avoid stocks with high volatility.
Working With Inexperienced Brokers
A broker is an important part of the day trading process. Working with someone trustworthy is absolutely vital. Inexperienced brokers and, unfortunately, trading scams, are a dime a dozen. That's why it's necessary to do some research before selecting a broker, taking time to vet them based on licensing and reviews before starting with small trades to test their capabilities.