How to Avoid Day Trading Mistakes (with Pictures) (2024)

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Co-authored byMichael R. Lewis

Last Updated: June 3, 2021Approved

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   Choose a trading strategy to increase your chances of success. Fortunately, you don’t have to reinvent the wheel to make money trading. There are 4 common trading strategies that you can use. If one doesn’t work for you, try a different one. Here are the most common trading strategies:^[1]

   • Swing/Range trading: With this strategy, you buy and sell stocks that tend to fluctuate often. Buy them when they’re at a low point, then sell them when they reach a high point.
   • Spread trading: This strategy relies on the difference, or spread, between what stocks cost and what buyers are willing to pay for them. A buyer will put in a bid for a stock that’s lower than its value, and you as an investor can swoop in and buy the stocks at a lower price. Then, you can try to sell the stocks for their true value.
   • Fading: To use this strategy, you buy a stock that’s become popular, then sell it when you think it’s reached its peak and buyers are starting to pull back.
   • Momentum/Trend following: With this strategy, you pay attention to a stock’s ebb and flow so you can buy low and sell high.

   Tip: About 99% of day traders lose money on a regular basis, and 90% of day traders will give up within 3 years of starting. It’s a very risky investment strategy, so set a budget for yourself and go slowly.

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   Decide what you want to trade. Stocks are the easiest asset to use for day trading, but you can also buy and sell other investments, like bonds, options, futures, or commodities. You might decide to start with stocks and branch out to other investments as you gain experience.^[2]

   • Consider what types of investments are attractive to you. For instance, are you looking for stocks under a specific price target? Are you looking for tiny movements in heavily traded stocks? Do you want to stick to stocks you know?
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   Plan how you will measure your success. It’s helpful to set some performance metrics for yourself. This might include how much money you’re making or losing, how many sells you’re making in one day, and how much your investments varied in price that day. Determine how you will measure your progress before you get started.^[3]

   • Consider how often you want to evaluate your progress. Will you review your data daily or weekly? How will you use your performance metrics to be more successful in the future?
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   Set aside money you can afford to lose to use for trading. Although you hope to make money from your trades, don’t risk losing capital you can't afford to replace. Most people lose money when they first get started, and even an experienced investor will lose often.^[4]

   • For instance, let’s say you have $2,000 to invest. You might take $1,000 of this money to start day trading. Giving yourself a cap can help you control losses.
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   Expect the unexpected and plan and exit strategy. The stock market is unpredictable, so you’ll see wild swings, unforeseen dips, and inexplicable turnarounds in a stock’s price. Don’t be surprised when things go wrong. Instead, have an exit strategy in place to salvage what you can from your investment.^[5]

   • For instance, you might decide to stick with a stock until it’s time for your afternoon trades, or you may decide to sell when it reaches a certain point. Either exit strategy can be valid, as long as you’re planning for it in advance.
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   See Also

   Investing Rules From The World’s Greatest InvestorsA Bull Market Is Coming: 1 Magnificent Artificial Intelligence (AI) Growth Stock to Buy Hand Over Fist and Hold Forever | The Motley Fool3 Dividend Stocks That Thrive in Both Bull and Bear Markets | The Motley FoolThe Beginner’s Guide to Navigating Stock Trading Platforms - Job From Home Blog

   Practice trading to gain experience. As with everything else, you should practice day trading before you do it for real. Fortunately, that's easy thanks to modern technology. You can set up a pretend trading account and trade stocks with absolutely no financial risk. TD Ameritrade offers a trading platform called "Think or Swim" that allows you to trade without using real money.^[6]

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   Remember that "hope" is not a trading strategy. It’s normal to hope your investments will make money. However, this isn’t a sound trading strategy. Be sure to plan out your trades using data and a logical plan, then follow through on the actions you plan to take.^[7]

   • The best way to make money playing the stock market is to plan your investments based on data. Avoid the temptation to listen to your gut.
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   Develop a business plan if you plan to get serious. Day trading is a business endeavor just like any other income-producing endeavor. As a result, you should develop a business plan that includes the following:

   • A list of the equipment you will need to become a successful day trader. At a minimum, you'll need a fast computer and an Internet connection. You might want to invest in a backup computer just in case there's a problem with your main computer.
   • A list of the training courses you'll take to receive the proper education about day trading. You'll probably want to start with some courses about how to predict trends in stock prices (that's called technical analysis). You might also want to take some courses specific to day trading strategies and how to be manage your money while trading.
   • A projection of minimum profitability over the short- and long-term.
   • A budget that includes expenses associated with day trading.

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   Buy your stocks in the morning between 9:30 a.m. and noon E.T. Stock prices are most volatile just after opening and right before closing. That means you want to make your purchases early in the day, as close to opening as you can. However, you may wait closer to noon if you need more time to select the stocks you want to buy.^[8]

   • It’s better to make a well-researched purchase later in the morning than to make an ill-advised purchase right after the market opens.
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   Sell your stocks between 3:00 p.m. and 4:00 p.m. E.T. This is the best time to sell most stocks, as the price typically moves in the afternoon. Hopefully, the price will go up, though there's no guarantee this will happen. Check the price of your stock before you sell to determine if it’s best to wait until right before the market closes, which is at 4:00 p.m. ET.^[9]

   Variation: As you get more experienced, you may decide to sell during the afternoon if a stock is fading. However, it’s best to get some practice playing the market before you start to do that.

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   Start with a small investment to test the waters. Chances are, you’re going to lose money in your first few stock flips. To avoid losing big, keep your investment small. Play the market with just a small percentage of the amount of money you’ve set aside for trading.^[10]

   • Think of day trading like gambling when you’re first getting started. Set a budget for yourself and treat it like an entertainment expense.
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   Read the news daily to learn which stocks are hot. Stay up-to-date on current events and financial news reports. This will help you recognize which markets are most likely to move soon. Additionally, you can watch for news about companies, which may impact their stock prices.^[11]

   • The trading platform you’re using to buy and sell stocks may have financial news available on the site as an added feature.
   • You can also visit numerous websites, like CNBC.com, TheStreet.com, and MotleyFool.com for other news.
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   Perform a post-trade analysis to see which stocks were profitable. After the trading day is over, look back on your trades and determine what happened with each of them. Why were the successful trades profitable? Did you take any losses? What resulted in success, and what resulted in failure? Take a lesson from each day’s trading.^[12]

   • You might also want to track stocks you’ve considered buying to see how they perform over a week. Write down the selling price of the stocks at the time you make your purchase, as well as the price when you sell. Charting the movement of the stock can help you decide if it might be a good investment for you.
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   Keep a trading journal to monitor your successes and failures. You can keep your journal on paper or use software for an easy option. Record all of your trades in your journal, including the amount you paid for each stock, what the stock sold for, and how much you made or lost.^[13]

   • For example, you can use Trading Diary Pro or Edgewonk to record your trades.
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   Stick to your trading strategy to minimize losses. It's easy to get caught up in emotions and a fear of loss when you start day trading and quickly succumb to impulse selling when it appears that a stock isn't moving in your direction. However, remember that you've put a great deal of effort into crafting a trading strategy that has a demonstrated history of success. Stick to that strategy and leave your emotions out of the process.^[14]

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   Use a stop-loss with every order. A stop-loss order sells your stocks if they reach a certain low point. This can help you minimize your losses if a stock starts to tank. When you buy your stocks, set your stop-loss at the lowest you’re willing to let the stock price go.^[15]

   • With a stop-loss, you will lose money. However, it might prevent you from losing big.
2. See Also

   A Bull Market is Coming: 2 Warren Buffett Favorites to Buy Now | The Motley Fool

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   Use limit orders to maximize profits. A limit order lets you set a price limit for how much you’ll pay for a stock or the lowest price you’ll sell your stock for. This lets you get the best price possible for your stocks. Since the stock market can vary, it’s best to always use limit orders.^[16]

   • For instance, you can set a limit order that says you’ll only pay $30 for a stock. That means your purchase wouldn’t go through if the stock suddenly went up to $45.
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   Avoid "chasing" stocks. You might think that you've stumbled across a great stock that can earn you a lot of money, so you starting bidding on it. After a little while, you find that your order isn't filled because the price went up. So, you increase your bid. That's called "chasing" the stock and should generally be avoided. Remember, the name of the game is to buy stocks at the right price, not chase them around just to get an order filled.^[17]

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   Adapt your trading strategy if the market changes. Although you will never fully figure out the stock market, you may be able to minimize losses by changing your trading strategy. However, plan these changes in advance. For instance, you might decide to switch from a momentum strategy to a fading strategy if your stocks are losing value unexpectedly. While you don’t want to switch strategies any time your stocks are losing money, you may want to adjust if the market changes.

   • Remember, alter your strategy based on underlying changes in the markets, not because of emotion or fear of loss.
   • If market volatility increases, that's a good reason to adapt your strategy to new market forces. However, if you change your strategy just because you took an unexpected loss, that's a bad reason to change your trading philosophy.

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