Many Americans, stuck at home because of the coronavirus pandemic, are putting federal stimulus checks and other money into online stock trading. Several leading brokerage firms have reported a surge in new accounts since much of the U.S. went into lockdown in March, and the stock market’s sharp recovery since the March lows, coupled with recent steps to reopen the U.S. economy, only fuels these newcomers’ euphoria.
Indeed, with zero-commissions, day trading seems like an easy way to make a quick buck. Unfortunately, most new traders make rookie mistakes that cost them real money.
Stock trading is a high-stakes game, so if you’re playing at least learn how to improve your odds. Here are seven common trading mistakes and how to avoid them:
1. Big, overconfident bets: Want to lose most or all of your money real fast? Make outsized stock-trading bets, like a roulette player betting it all on red or black. In fact, big trading bets are a form of gambling.
Steer clear by trading in small amounts — 100 shares or less — and, it goes without saying, don’t bet more than you can afford to lose.
2. Overtrading: Many day traders buy dozens of stocks that are moving up, hoping for a quick profit. Day trading too often and with too many stocks is a recipe for disaster.
Trade just one or two stocks a day. Trying to manage anything more is for jugglers, not traders. Although the pattern day trading rule is annoying (you are limited to three trades in a five-day period if you have less than $25,000 in your account), it forces you to trade less but more accurately.
3. Holding losers too long: Knowing when to sell losers takes experience. If you sell too quickly, you miss out on potential profits if the stock reverses. If you sell too late, you incur bigger losses. Most novice day traders typically hold their losers too long, hoping they will get back to even.
Remember, you’re trading, not investing. Don’t hold losers, and rarely keep a position overnight. Once it’s clear the loser is not coming back before the market’s close, sell and live to trade another day.
4. Selling winners too soon or too late: Managing your winning positions is as challenging as managing the losers. Many traders sell winners too early, missing out on bigger profits. Even worse, if they hold some winners too long, a profitable position can plunge to zero.
The solution: Plan in advance for when to sell and stick to it. If you land a big winner, sell it all. If for some reason you have trouble doing that, then scale out of a winning position by selling half of it now and the rest later.
5. Too many technical indicators: Many beginners believe the more market indicators they use, the better, as if indicators will lead you to the Holy Grail. Watching too many indicators is confusing and distracting, and prevents you from focusing on the only thing that counts: the market itself.
The fewer indicators you use, the better. Choose one or two that work best (you have to experiment to find which works for you) and master them. Day traders I know use VWAP (Volume Weighted Average Price), or the NYSE Tick, for example.
6. Panic buying the hottest stocks: Momentum trading has been the rage, and many traders did well with hot stocks such as Tesla
TSLA,
+8.65%
, Nvidia
NVDA,
+2.22%
, Netflix
NFLX,
+3.16%
, and Beyond Meat
BYND,
+1.30%.
The easy days are over for momentum trading, , yet many beginners still focus on the stocks that have had the biggest runs. What typically happens to these momentum stocks is that they stall, then fall, taking day traders’ money with them.
Chasing hot stocks is risky and should be avoided because momentum can quickly turn against you. It’s all right to follow strong stocks whose price is trending higher — just don’t chase them. Day trading is enough of an emotional experience without you buying or selling in a panic.
7. Not enough practice: Read a book or watch a video about day trading and you might think you’re ready to clean up. You’re not.
Too much money and too little experience is a bad combination. Before staking a dime on a stock, practice with a simulated trading account to build your trading muscle. When you do venture in, trade with 100 shares or less until you understand how this part of the stock market works. (See tip #1.)
Michael Sincere is the author of “Start Daytrading Now” and “Understanding Options.”
More: Are you a trader, speculator or investor? Ray Dalio and Jim Cramer weigh in on stocks
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