Trading Pitfalls and Mistakes
article is an abstract of the book:
The Complete Guide
to daytraders, position traders usually have much more time to make
a decision and to enter or exit a trade. Their decisions are made
using general price targets. They do research on the stock, read
the news and earning reports and then make decisions with a long-term
target in mind. They ride the plays where the stops are wide.
can't daytrade that way because you will lose all your money. But
many daytraders are also position traders or former position traders,
so it's important to know the difference between the two. This chapter
is perhaps the most important in this book because it will give
you an idea of the reasons why so many traders fail as daytraders.
our opinion, position trading corresponds more closely to human
nature than daytrading. Position trading forgives mistakes more
generously, it gives traders more time to make decisions and it's
simpler - but not easier - to do. It is much more in accordance
with the human character. For example: in daytrading you must buy
at the bottom without seeing any "confirmation" whereas it is much
easier to buy something that is already moving up because it confirms
your own decisions. Also, position traders don't need to sell immediately
if the price drops below the entry point. They give the stock more
time to develop. Position trading is hard work and needs a great
deal of experience, but it is much more in tune with human nature
than daytrading and so it is easier for most people.
daytrading, however, doesn't forgive even the smallest mistake.
There is almost no space for mistakes in daytrading. You
also have very little time to make decisions, and if you make the
wrong decision you have to cut your losses and exit the trade immediately,
without hesitation. You can't afford to ride a trade down. Many
daytraders have gone broke by doing this.
need to make most of their money within seconds or, at most,
a few minutes. The reward is they get paid immediately if they
are right. The bad news is that they must also pay immediately for
the end of a day, a short-term daytrader knows exactly how much
money he has made or lost. He liquidates all his positions and ends
the day in cash. Each single trade gives a report and some feedback
about its success. If you make mistakes, you will have to pay for
them instantly. If you do it right you get paid instantly in turn.
This continuous and instant reaction to what you are doing may sometimes
cause serious emotional problems. It's hard to keep your emotions
under control, especially if you are doing very well or very badly.
To succeed in daytrading, however, you must make decisions that
are absolutely correct within a very small time frame and this means
you can't afford to let your emotions mar your judgment.
need to stick strictly to the rules, otherwise they fail.
It's that simple. But this goes against basic human nature and so
many daytraders fail because they can't handle the emotions, the
stress, and having to stick to some very strict rules. The difficulty
is to maintain this, not only for a few trades - everybody can pull
himself together for a limited period of time; if you want to do
daytrading for living, you must be able keep control of yourself
each minute of every single trading day. That's the real challenge.
It will take some time before you have learned all the rules, but
it will take much longer before you can make a living by sticking
to them. And you can't stick to rules if you can't keep your emotions
don't have to trade all the time.
You don't have to make a large number of trades.
You don't have to use big share sizes.
You are NOT under pressure.
chat room will give you an environment in which you can focus on
your trading. The room is strictly regulated to avoid any disturbances.
In it you will only find traders who have the same aim as you, trading
the same patterns as you. They are all trying to learn daytrading
together. Any hype is prohibited and will lead to an immediate ban
from the room.
most important thing traders need is the ability to focus on the
really important things without being distracted. Alert-Trading
provides that kind of environment for you. We assume that our traders
want to make money and want to learn daytrading to make a living.
They can't do that if there are too many distractions.
is no way to make big money other than to work hard for it, although
we must say, when you consider the amount of work you have to do
daytrading and the money you pull out it if you succeed, daytrading
is clearly overpaid. Once you have learned the right way to do it,
you will make more money than you have ever dreamed of.
most common and most serious mistakes:
the stop loss
Trading fast stocks
Trading low percentages
being self-disciplined and not sticking to the rules
Not having a plan and a clear set of rules
profits too early
Not taking a profit when you need to
Making it back
Overtrading - doing too many trades
Not picking the appropriate route for execution
Not having the right broker
Not having reliable technical equipment
Never ever hold a stock that is hitting your stop loss price. Always
exit without hesitation when the target is hit. Don't think, just
do it. Remember, traders go broke because they don't stop their
losses. Act like a robot, just hit the button. If you have learned
the patterns well you'll know when to stop. When you don't know
when to stop, don't trade. You must know the exit price before you
enter the trade. You must know where you will exit when things go
wrong and where you will take the profit when things go well.
Chasing is one of the biggest mistakes you can make, and one of
the hardest to prevent. Traders like to see some confirmation before
they go long (or short). They see a stock selling and they know
there is a good opportunity coming up to go long. They see the stock
making a bottom and instead of buying, they wait for some confirmation.
The stock bounces and they enter their order too late. Unfortunately
that's the worst time to enter a trade long for three reasons:
You will find it hard to get a fill because everybody is buying
and nobody is willing to sell a stock that is bouncing.
You pay a high price for your confirmation. It's our experience
that chasing can cost ¼ to ½ point extra per trade. That has an
enormous impact on your performance because it reduces your profit
dramatically. Since you are a daytrader, the average profit for
a trade usually is in the range of ¼ to 1 point. You make your living
by pocketing smaller profits several times a day. You can't afford
to leave money on the table because of chasing. The chaser enters
the trade when other traders are already contemplating exiting it.
If you are wrong, then your loss or stop is greater because you
have paid a higher price for the stock than traders who bought at
the bottom and didn't chase. Let's assume a stock plunges to 30
x 30 1/8 and stops selling there. Trader A buys the stock, gets
a fill at 301/16. He joined the Bid when some folk were still trying
to sell the stock. Sometimes he even gets a fill below 30 because
other traders panic and sell below the Bid. Trader B hesitates,
looking for confirmation. He knows it would be a good idea to go
long but he isn't sure. The stock starts moving up, within a few
seconds the quote is 30 1/4 x 30 3/8. Buyers are lining up now at
the Bid. They see the stock bouncing. They try to get a fill but
it's difficult. The sellers are backing away because they see the
stock bouncing. They are waiting until they get a higher price.
For a buyer, there are not many shares left because now more of
them are fighting to get in.
B recognizes this and knows he has to pay the Ask price to get the
trade. With some luck he might get the stock at 30 3/8. If he is
even luckier, he might get a complete fill and not just a partial,
because he certainly won't be the only one trying to get in at the
Ask price. Trader A is in at 30 1/16 and has a nice (paper) profit
already, while the buying is just getting started. He knows that
he is in a strong position to get an easy fill at the Ask. Buyers
will be pleased take his shares and pay the spread for him. He decides
to enter a limit sell order at 30 15/16 and waits until somebody
takes him out. He knows that most traders will sell at round numbers,
so he doesn't sell at 31 but 31 15/16 to be one step ahead of all
the other sellers. He is right. Buying was good and he got the fill.
He has made a profit of 7/8 of a point.
Trader B exits at the same price with a profit of 9/16. Trader A
made 5/16 more than trader B. Plus:
B could easily have missed the trade. He was lucky to get a fill.
B was lucky to get all the shares he wanted. He could easily have
got a partial fill only.
B made a good profit because the bounce was very good.
what happens if the bounce is not so good? What if the stock bounced
only a little bit? The stock would pull back to 30 and selling wouldn't
stop. Trader A and B would exit the trade at 30. Trader A would
be out flat or with a small loss, B would make a 3/8 loss. If this
sort of thing happens several times a day, each trading day, it
could make a big difference to each trader's long term profits.
really isn't easy to buy when there is still no sign of major buying
interest. You need experience to do that. You need a great deal
of self-confidence to know when you are right. It will be some time
before you have sufficient experience to be completely self-confident.
Nobody can trade without having some losses from time to time; losses,
after all, are part of our every day lives. But you can learn to
identify high probability trades, and being able to recognize high
percentage trades makes it much easier to buy at the bottom and
to overcome fear.
the right trade
Don't force trades. Wait for the high percentage plays to come to
you. Everything else may lead to losses. Many traders make good
money and lose
it all later with low percentage plays, just because they couldn't
to the rules
Act like a robot. Don't think, just act. If a high percentage opportunity
comes along, take it, because you will have learned to recognize
one when you see it. Stop out if it goes lower. Don't hesitate,
just do it. Exit if the target is hit and take the profit. Once
again, don't think. Do it. It's wrong to change the rules or think
about them during trading hours. Either you trade or you think about
your rules. You don't have enough time to do both. Remember, you
must remain totally objective and in control at all times.
It's a good
People often blow their stops or just buy and hold (buy and hope)
because they say to themselves: "It must go up, it's a good company,
the fundamentals are great, earnings are better than ever ." But
we ask: Who cares? If markets sell down, your stock will go down,
too. No one asks how good the earnings have been, they just sell
the stock because it's going down. You must decide whether you are
a position trader or a daytrader. For a daytrader, information like
P/E, earnings, and so on is worthless. You are in the trade for
a few minutes, a few hours at the most. How much can the earnings
or P/E ratio have changed in those few minutes? No one cares. The
current momentum of the stock and the market direction is much more
important. Think about what's important now, and what may effect
your trade now. Check for breaking news, watch the NASDAQ and S&P;
500 futures, check the pace of the stock, the spread, the current
supply and demand with Level II, and the Tick indicator for NYSE
You buy a stock, it goes down. You buy more, it goes lower. You
buy more, etc. That's averaging down. A fatal mistake. You say to
yourself: "If the stock was interesting at a higher price, it's
even more interesting now at a lower price. This sounds logical
and may even be true, but it breaks another rule that has a much
higher priority: Stop out of a losing trade.
is no doubt which is better out of averaging down or stopping out
and re-entering the trade. Stopping out and re-entering is a much
better proposition, for several reasons:
If you are out of the trade, you can watch the sell off objectively
and make an intelligent decision. Do you really want to re-enter?
Is the trade still interesting or did you make a mistake and the
whole trade hasn't been good anyway?
2. In most cases stopping out costs much less than averaging down.
3. If you are in a situation where you are thinking about averaging
down, you are already admitting that you have made a mistake: you
entered the trade too early. What makes you so sure that entering
the stock again isn't another mistake? What if you are wrong again?
4. The stock may never come back to your entry point.
5. Staying in ties up too much money.
6. The stock may make several new lows, taking your average entry
point higher and higher. Every time you average down, you invest
more money in a sucker play, and that can end in disaster.
are situations where you can't stop out very easily because the
stock plunges like a rock. If we are stuck in a blown stop it's
very difficult to make an objective decision, even for an experienced
trader. We all hope that a blown stop will come back to us, nobody
wants to sell at a low point then watch the stock bounce back to
the entry price. However, you must be very aware that your emotions
can easily cloud your judgement in a situation like this. If you
are not 100% sure of what you should do, stop out before the situation
gets out of control.
Taking profits can be a mistake, especially if you take them too
early or, for that matter, don't take them at all. Many traders
have this problem because they fear that they might lose their profit
if they hold it too long or they might miss an incredibly good profit
if they exit too soon. That's true, of course. If you hold too long
you can easily lose your profit. If you don't hold long enough,
you can miss a good run. The key question is: What is too long?
If your fear gets the better of you, you will sell before a target
is hit and you will be out too early, making a loss: you will have
lost the difference between what you did earn and what you could
have earned. You must have a target price at which you will sell
the stock and you must stick to it. Other traders have a problem
with taking the profit. They always believe that the stock will
go up much higher. If you have no fear of losing your profit, maybe
you are greedy. Maybe you are waiting for a greater profit but the
target has already been hit. We all want more profit, but you must
be realistic about it. Again, set a reasonable target price and
exit there. Don't think, just press the button.
should set our target prices before we enter the trade, just the
same as we do with our stop loss prices. We should do this for a
very good reason: to set your stop and profit targets, you have
to think clearly about the trade and judge the risk and the potential
before you enter it. This clears your mind and prepares you properly
for the trade. Once you are in the trade, your emotions may influence
your judgment much more than you would like. Many other details
may influence you as well. Once you are under pressure you can't
make proper decisions, so it's much better if you have made them
before you enter the trade. Don't tell us you don't know how much
the stock will go up. You must know. If you don't know, you shouldn't
be entering the trade, because otherwise you are merely gambling.
The patterns tell us what is possible and what is not. If you don't
know the target prices of the trade then you are not ready to trade
exit the trade
If there is anything you don't understand, exit the trade immediately
because you have just lost control over it. You can't just hope
that it will go in your favor. You need to have control over yourself
to control the trade, so it's better to exit immediately and to
think about it objectively from a safe distance.
If we lose money, we become frustrated and want to get it back with
the very next trade. This is a dangerous attitude and can lead to
serious losses because you aren't objective anymore. The traders'
most powerful weapons are patience, discipline and objectivity.
There is no way other than waiting for the perfect trade to come
to you. You can't force trades. You can't decide: "This is it. I'll
trade now and make some money. " You can only take what the markets
loss makes us impatient. We want to make it up as soon as possible
to compensate for feeling stupid because we made a mistake. However,
we must wait for the right chance, otherwise we risk losing even
professionally. Turn losses and bad trades into opportunities to
learn. Try to shut out all emotions. Pay up and learn your lessons,
or you'll find yourself paying the price for making the same mistakes
over and over again. It's that simple.
Impatience is one of the daytrader's greatest enemies. A daytrader
spends most of his time waiting for the perfect trade to appear.
Some days are extremely busy, but others are slow, and sometimes
we simply can't find a good trade. It is therefore very important
not to make the mistake of trading just because you are bored or
impatient. That's low percentage trading, and low percentages equal
losses. There is a right time for everything, so stick to it. You
can only make money if the markets are ready to give it.
Many successful traders say that their biggest losses occurred right
after they had made a big profit. By accident? No. The markets are
merciless. The more successful you are, the more careful you have
to be because you are trading with a bigger share size. An error
with a large share size can lead to fatal losses. Also when we make
money, we feel good, we loosen up a little and we get careless.
At a certain point we even believe we can't lose. Each new trade
is a new chance to make money, or to lose it. Stocks don't care
how you feel. If you get careless, you will have to pay for it.
Overnight positions are very risky. Read more about this in the
chapter entitled: "Opening prices, gaps, overnight risks."
Many new traders make the fatal mistake of trading the hot stocks.
These promise fast and fat profits, but all they usually earn you
is a fatal loss. We see this happening every day and we wonder why
traders keep doing it. For example: IPOs usually move very fast.
The pace is extremely high and quotes are often delayed because
of the large amount of action, but greed is more powerful than reason
and the traders jump in regardless. Fast moving stocks are for very
experienced traders only.
don't need fast stocks to make good money. They don't usually have
good risk-reward ratios, so if you are not experienced in trading
them, you'd be gambling with your money if you touch them.
sometimes watch other chat rooms and we always see the same thing.
Headtraders are calling the fast stocks because they want to provide
some action for the room members. It's a nice show. The lucky winners
are posting their trades, but you don't usually hear from the losers.
The headtraders are yelling: "Winner Alert! Winner Alert!" The headtraders
are the stars because they have provided their members with a multiple
point profit. That looks good on the homepage as well. There you
can read +1,000% performance for the year, +30% today, etc. That's
entertainment. In any game show there's a winner for the day and
nobody cares what happens after that. Nobody complains that the
spread was 1 point, the quotes were delayed, the risk was incredibly
high and getting a fill had more to do with luck than good management.
Those seem to be unimportant details.
Overtrading is when you do too many trades. Don't trade because
you are bored or you like the action. Trade only when the odds are
in your favor.
You should pick the proper way to execute your order every time
you do a transaction. Many traders are not flexible enough. They
always use the same route to get a fill. Some try it with SOES,
some with ARCA, others with Island, all the time. They don't switch
to a different route when it's necessary to do so. Learn to work
with all of your order execution functions. Learn everything there
is to know about the different ECNs and how to trade with market
makers. You can find all the information you need about these in
Using the wrong broker is one of the biggest mistakes a trader can
make. The wrong broker can cost you thousands of dollars each month
when your orders are executed too slowly, when you don't get price
improvement, when you can't join the Bid or Ask, when you can't
cancel quickly enough, when you have to pay for partial fills, and
so on. Read the chapter: "Picking the right broker."
Don't cut back on the equipment costs. You will be depending on
your system so it has to be totally reliable. Read about a proper
system setup in the chapter: "Technical Equipment."