Day Trading Mistakes: Avoiding Financial Risk in Short-Term Trading

Learning how to day trade can provide you with a way to make a comfortable living. However, if you do it incorrectly, you could lose a large amount of money, very quickly. Here are a few steps that could potentially lead you to financial disaster in day trading.

1. Trading on Borrowed Money or Margin

One of the biggest mistakes that you can make in the stock market is to trade with borrowed money, or trade on margin. This creates a situation where you are taking on a large amount of risk. When you have to borrow money just to get started, this most likely means that you should not be involved in the market at all. If you were to lose a big trade, you would find yourself in debt to another individual without any way to get the money back. Losing margin money can be financially devastating and can lead to serious problems in your personal life.

2. Attempting Market Timing

Another mistake that many traders make is to try to time the market. Trying to time the market generally results in most traders losing money. Many studies have shown that timing the market does not work over the long-term. You may decide to try to get into a particular trade and then watch the direction of the market reverse. At that point, you might suffer a big loss as a result. 

3. No Research

One of the biggest mistakes that day traders make is that they do not research enough. Before you get involved with any trades, you should conduct a thorough amount of research on the stock that you are considering purchasing. If you do not do enough research, you will find yourself purchasing a stock that should not be purchased. Many people make the mistake of following the masses, or listening to a stock analyst, to tell them what to do. You need to always make your own trading decisions and they need to be based on your thorough research.

4. Risking Too Much

Another mistake that many people make is that they risk too much money on a single trade. You should always risk a reasonable amount of money depending on how big your account size is. For example, many professional traders never want to risk more than 1 to 3 percent on one trade. Many new traders that do not know how to day trade effectively risk 50, or even 100 percent, of their account on a single trade. You need to develop some individual guidelines for money management and stick with them.

5. Buying Before Bankruptcy

Some traders will try to purchase the stock of a company that is on the verge of going into bankruptcy. They do this because they believe that they can get a bargain on the stock in purchase many more shares than they would normally be able to purchase. In theory, this could work, but it is a very risky proposition. If the company goes out of business, your investment is worth nothing.