Most successful day traders will tell you that day trading (or swing trading or investing) is as much mental as it is the strategy you use. Why? It takes mental toughness to stick to a strategy! Every trade looks a little different than the last, so it's easy to question a trade or method even if you've seen or known the strategy works. The inability to stick to a day trading strategy leads to all sorts of issues, such as entering trades too early, getting out too late, risking too much, not risking enough, entering too late, getting out too early, skipping trades, or trading too much. There are a lot of ways to mess up a trade, and most of them come from mental slip-ups. Here are five commons ones to watch out for.
Lack of Confidence in Method
When you really believe in something you just do it.
Your trading strategy should be like that. Make it so ingrained and practiced that it becomes second nature. Know that following your strategy works, and doing anything outside of the strategy is an unknown, and therefore not worth the risk.
How do you gain this sort of confidence in your method? There is only one way, and that's to practice it until there's no doubt in your mind that it works. That could take several months, but it will go a long way to reducing many of the mental errors discussed above.
Not Preparing for the Day
Your life may be busy but making sure you're prepared for the trading day is a necessary step. It involves simple things like checking when high impact economic data is due out, or checking the stock, forex pair or futures contract you're trading for specific scheduled news (earnings, commodity report, etc). It means making sure the settings on your trading platform are correct, that you're focused (discussed next) and that you've eaten and gone to the bathroom...so you don't have to leave your trades/potential trades at an inopportune time.
Create a day trading routine that you follow each day; this will help avoid mistakes such as accidentally having a position when a major news event comes out. It is easy to take this stuff for granted and forget to do it some days. That's a mental big error.
Trading While Sick or Unfocused
It takes mental effort to follow your day trading strategy. When sick or focused on other things (maybe relationship or family problems, health issues or sickness in the family, money problems) the attention required to trade is divided. It makes us more prone to making mistakes, such as entering the wrong order, messing up our position size, missing trading opportunities or acting out of emotion instead of following our strategy.
If you're going to trade, do so when you're focused and healthy. You should have the mental energy to follow your plan. If you don't, don't trade. If you start trading and notice you're feeling off, and are messing up trades, stop trading. The markets will be there tomorrow or the next day. Take the time you need. You'll be thankful for the money you don't lose.
Letting Prior Trades Affect Future Ones
If you see a valid trade, should whether you won or lost the last trade affect your decision? No, but for many traders it does. The mental error is to assume that the probability of this trade is tied to the last one. It isn't. If a trader wins 60% of her trades, if she sees a valid setup a reasonable assessment would be that the trade has a 60% chance of success.
Trade valid setups, and don't let the last trade create fear or greed. This trade is an independent event, trade it how your strategy and trading plan dictate. Past losses can't make you afraid to trade (assuming you have a profitable strategy and know how to day trade), and past winners can't make you arrogant. Trade one trade at a time; that's all we have control over.
Trading Beyond What a Strategy Allows
Each strategy has thresholds. For example, it only produces so many trade signals a day, it limits your position size, it only works in certain markets or at certain times. Trading within the limits of a strategy means you get to reap its rewards. Getting greedy and trying to make more than the strategy can accommodate--such as trading outside the times that it works, trying to find "extra" trades, or using it in a different market--may have a negative effect on overall profitability.
If you have a profitable system, trade it as it is meant to be traded. Over time capital will grow and you'll likely be able to produce more income from it. Try to stretch it beyond what it is capable of and it will cease to work as expected. If you don't have a profitable system to follow...revert to the first point above.
Mistakes happen while trading. Help avoid them by having confidence in your method, taking a few moments to prepare for each trading day, trading only when focused and healthy, focusing on the current trade and not past ones, and staying within the confines of your strategy.