Every trader has bad habits.
And I am not talking about the over-stressed, nicotine/alcohol/junk food lifestyle many find themselves living. I am referring to actual trading habits.
Some of these stem from individual personality traits, while others are due to a combination of arrogance and simply being stubborn. I interact with hundreds of new traders a week, and without fail almost all of them have some, if not all, of the issues listed below.
While I try to discourage them from repeatedly making the same mistakes, it is also without fail that most do not listen. Some do, and I have watched them become consistently profitable traders over time, but others prefer to argue despite their lack of monetary reward.
As a professional Day Trader (i.e. consistently profitable to the point I can support myself/family off the revenue) I know how hard it is to do this. I am also know that it is very doable, and those that watch me trade everyday can see the results. Given how difficult this is to master, it is made even more so when people continue to commit the same mistakes over and over again.
So without further adieu – compiled from my countless conversations – are the biggest mistakes I see being made on a regular basis:
Trading Without Knowledge – Time and again traders will enter into a trade because they read a post or followed a trade live, and they have no idea what they are doing. You would think it should be common sense that someone should know how an option spread works before committing your money towards one, but apparently not. On Friday a trader asked me what “assignment” meant after they just bought a Call Option that expired on that same day. I do not hold out much hope for that trader.
Rushing Into A Trade – Perhaps a stock is moving up quickly, or someone just posted they shorted a position, and instead of taking the time to look at the charts, looking at the best entry and exit points, deciding on position size, etc – they just jump into the trade without thinking. Again, you might think this advice is obvious, but it is not.
Relying on Others – As someone who publicly posts their trades I know full well the pressure of having many traders follow you into a trade. And while I am posting the trades for educational purposes, I also realize that some people just want to grab quick trades that someone more experienced has chosen. This is an unfortunate practice. Not only are the constant questions annoying as hell (e.g. “Are you still in?”, “It’s dropping, should we exit?”), but it doesn’t help a trader to just blindly follow someone, in fact it can hurt them quite a bit. Because if you are relying on someone for a trade that also generally means you are relying on them to exit as well.
Position Sizing – This is a common refrain and no list of mistakes would be complete without it. No matter how often you tell traders to work on their win rate, start slowly, find your strategy first – it doesn’t matter. Someone with a $15K account is buying 30 $1 calls on a stock and using 20% of their account on one trade. Hit singles, stop swinging for the fences.
OTM Options – This warning always gets an argument, but arguments do not change facts and the facts are – OTM options are generally not a good idea. Sure, if you are doing Friday lottos, or an OTM Bullish Put Spread they are fine, but overall one should not be gambling with OTM options. Yes, they are cheaper, and they are cheaper for a reason – you are paying no intrinsic value. In fact, they aren’t really cheaper, because you are actually paying all premium. Traders lose more money on OTM options than almost any other type of trade.
Anticipating – One of the absolute worst trading habits there is and it is done by both new and experienced traders. Nobody wants to miss a move, so people jump into trades before confirmation. This would be all of the people that went long on SPY a week ago (most likely using OTM options) thinking it was going to bounce back, only to see it drop even further. Traders love to try and guess tops and bottoms of charts, a practice that they continue no matter how often it loses them money. Another version of this is trying to predict the market based on external factors – i.e. “The infrastructure bill should help stocks like CAT, I am going long!” Always confirm first – let the chart tell you what is happening – Institutions move prices, so let them go first and then follow the money.
Overthinking – Trading is hard, there is no doubt about that. It can takes years to get good at it. But that does not mean it is complicated. I see traders all the time with so many indicators on their charts that you can’t even see the candles. Many of them are looking at esoteric studies and rarely used analysis to help them make decisions. Remember, Technical Analysis works insomuch as other traders also are following the same guides, and trust me, not many people are looking at the 73 SMA on the 4 hour chart.
Rethinking the Wheel – So you been trading all of three months and you think you’ve cracked it with your new method? You haven’t. Trust me, there isn’t anything you can try that hasn’t been tried already. Now if you have been trading for many years, have had consistent success and then come up with a new method of trading – great, that should be of interest to everyone. But way too many new traders think they can find a surefire system that can beat the market.
Decision-Making Bias – There are several that impact traders, especially newer ones – whether it is Anchoring which would have someone looking back at that first successful trade as an example of how to move forward, or Survivorship where people tend to only look at the winners and ignore all the losers (GME is an example of this), this type of thinking gives a shortcut to correct decision-making. And in trading, there are no short-cuts.
Trading P&L – Really hard to break-free of this. So many traders will set their stops based on a preset amount of money, or exit a trade because they are “down too much”. You should be basing you exits on the charts, not your P&L. Time and again I see people jump out of trades they should have stayed in because they were afraid of “losing too much” (see – Position Sizing) only to have those trades turn into winners. Exit a trade when your thesis for entering no longer applies.
Believing in Losers/Scared of Winners – Unless you were born rich, you have experienced financial struggle in your life. When things go right we are always expecting “the other shoe to drop”, and when things go wrong we are always hoping they turn around soon. Unfortunately we bring this mentality to trading. It is why we take profits too early and let our losers run too long. When we are in profit many times we are so afraid of losing our gains we exit the trade even though it is going our way. And when we are down, way past the point of the stock violating a technical level, we constantly believe it is just about to turn around. Because of this our losers can tend to be bigger than our winners on average – and that is not way to make a living.
Ignoring the Market – Successful Day Traders know that if you get the Market right and the Stock right, you will make money. But many traders ignore the market. Are you shorting a stock on a day the market is really strong? How is the stock performing relative to the market? One should always have the SPY 5 minute chart up and running in the background and constantly checking it.
Momentum Trading – I saved the biggest one for last. This is also the most argued and most difficult to get people to stop doing. The entire field of Day Trading has been corrupted by YouTube videos promising people they can get rich quick using very simple methods. All of these videos are doing minor alterations to Gap n Go strategies, where one plays the momentum of morning gappers (most are found earlier in the day). Ironically, this is actually one of the most difficult types of trades to do with consistent success. Most professional Day Traders actively avoid them, except in rare circumstances. Yet, many new traders believe that Day Trading is Momentum Trading – it is not.
I can absolutely assure anyone reading this that if you stop doing these mistakes your odds of success would increase dramatically. However, I also get that it is difficult to change. Overcoming these issues is part of the reason it takes time to be a successful trader. Learning how to trade isn’t that difficult, but learning how to be a successful trader can seem impossible to some.
Look through this list, try to figure out which of these causes you the most trouble and focus yourself on working on the issue(s).