Easy Part Of Day Trading: Making Mistakes

Day trading sounds so easy, doesn’t it? After all, isn’t it just sitting at your computer all day, buying and selling stocks — and piling up profits? Well, not exactly. Few people realize how much experience and skill is needed to make money as a day trader. It’s easy to get tripped up by mistakes, especially during your first year.

Here are 10 of the most common errors many day traders make.

1. Not having a plan

“The most common mistake traders make is entering a trade without a good plan,” says Toni Turner, author of “A Beginner’s Guide to Day Trading Online.”

“Nearly every mistake can usually be traced to trading without a plan.” Too many rookie day traders enter the market without appreciating that they are wading into potentially dangerous waters. Protective planning against losses means determining your entry price for buying a particular stock, your exit price and an escape price — also known as a stop loss.

2. Misusing margin

If there is anything that can destroy a day trader’s account, it’s margin. That’s when you borrow from a broker to buy securities. If used properly, margin is a valuable tool that can boost profits and give traders breathing room. When margin is used improperly, financing a trade with borrowed money can be dangerous to your wealth. In the past, many people misused margin, borrowing more from the brokerage than they could afford. It wiped out some traders’ accounts and helped to give day trading a bad name. It’s best to day trade with money you actually have, not money you borrowed.

3. Chasing trades

One of the most common day-trading errors is chasing a fast-moving stock on the way up or down. More than likely, this could lead to an unprofitable trade. “When we see a stock go higher and higher, we all want to join in the celebration,” Turner says. “The problem is that experienced traders are going out the back door while new traders are coming in.” If you miss a stock on the way up or down, let it go. There will be other trading opportunities.

4. Not understanding market and limit orders

Not everyone agrees on which is best — market orders or limit orders. A market order is an order to buy or sell a stock at the current market price. With a limit order, you can establish your maximum or minimum price for trading a security. Market orders get filled fast, but you let the market control your order. Conversely, limit orders allow you to control the parameters.

“Now that spreads are a penny or two on many stocks, limit orders make no sense,” says Deron Wagner, founder and head trader of Morpheus Trading Group. “You could miss a fast-moving stock just to save a few cents.” With high-quality liquid stocks, you can use either a market or limit order.

5. Listening to tips

At least once, nearly every trader gets fooled into buying stocks based on tips from persuasive sources. Even when the tipsters are right, they aren’t there to tell you when to sell. It takes a lot of self-control to keep your ears closed, but successful day traders rely on their own judgment — not on what others are saying.

6. Refusing to cut losses

It’s human nature to hope that a losing stock turns around. But if you’re a day trader, refusing to cut losses can damage your account. “Instead of hoping for a stock to go back up, take that money and transfer it into a stock that is really going up,” says day trader John Kurisko, host of Day Trading Radio. When a stock is headed south, be disciplined enough to prevent a small loss from turning into a much bigger one.

7. Trading too early or too late in the day

The first and last 15 to 20 minutes of the trading day are usually chaotic, as market orders are filled from anxious investors rushing to make moves near the opening or closing bell. You also are competing with institutional and high-frequency traders. “The first and last 15 minutes are too volatile for new traders,” Kurisko says. “It’s like the Wild West, and sometimes there is no rhyme or reason to it. Also, the indicators don’t have enough data, so they get choppy.”

8. Letting your emotions rule

What does it take to become a better trader? Discipline. “You need to develop a set of strict rules that takes the emotion out of a trade,” Kurisko says. “Most day traders use technical analysis.”

For example, Kurisko uses stochastics, an indicator used by many traders to determine if a stock is overbought or oversold. If the stock is oversold, then he starts to buy. “You must listen to the charts, not the news,” he adds.

9. Having unrealistic expectations

Some rookie day traders keep looking for something magical that will bring them easy profits. A few have already calculated how much money they plan to make in the market. Unfortunately, the market has other ideas. “Don’t seek a silver bullet,” Wagner says, “because there isn’t one. Some people will jump around looking for different instruments and strategies without taking an honest assessment of themselves. There is no easy way to play the market.” He says traders need a strategy, rules and discipline to become profitable.

10. Going into day trading uneducated

Uninformed day traders think that anyone can make money day trading. But to be successful at it, you’ll need training. “If you were laying on the operating table, waiting for your surgeon to take out your appendix, you wouldn’t want that surgeon to walk in reading a pamphlet, ‘How to Remove an Appendix in 10 Easy Lessons,'” Turner says. She says to be a consistently winning trader, you should start with paper trades, and then study hard so you understand how the market works. “Learning to day trade successfully can take as long as going through college and obtaining a degree,” she says.

Glossary: Terms a day trader must know

Ask price (or offer)
The lowest price a seller is willing to accept for an individual security. Put another way, the price at which the security is offered for sale.

Bid price
The highest price a buyer is willing to pay for an individual security, i.e., the best price the seller will receive.

High-frequency trading
A computerized trading strategy that uses complex algorithms to make short-term trades at fast speeds.

Intraday
Within one trading day, as in a stock’s “intraday price movements.”

Limit order
An order to buy or sell a stock within price limits. You declare the maximum price you are willing to pay or the minimum price at which you are willing to sell the individual security.

Liquidity
A measure of how quickly you can get into and out of a security at the same price level.

Margin account
A type of brokerage account that allows you to borrow cash from the broker to buy securities.

Market indicator
A technical, sentimental, fundamental or economic indicator that gives signals to future market direction.

Market order
An order to buy or sell stock at the current market price.

Pattern day trader
Under U.S. Securities and Exchange Commission rules, a trader who buys a security and sells it the same day and does this at least four times over the course of five business days. The SEC requires these traders to follow certain rules.

Scalping
A day-trading strategy that allows you to make profits on extremely small price movements. That is, you enter and exit a stock within seconds or minutes for quick profits. You’ll make many trades and aim for smaller profits on each.

Shorting
A strategy that allows you to borrow shares of stock from a brokerage, sell them to another buyer and then buy them back later at a lower price to return to the lender.

So You Want to be a Day Trader?

Day trading sounds so easy, doesn’t it? After all, isn’t it just sitting at your computer all day, buying and selling stocks — and piling up profits? Well, not exactly. Few people realize how much experience and skill is needed to make money as a day trader. It’s easy to get tripped up by mistakes, especially during your first year.

Here are 10 of the most common errors many day traders make.

1. Not having a Plan

“The most common mistake traders make is entering a trade without a good plan,” says Toni Turner, author of “A Beginner’s Guide to Day Trading Online.”

“Nearly every mistake can usually be traced to trading without a plan.” Too many rookie day traders enter the market without appreciating that they are wading into potentially dangerous waters. Protective planning against losses means determining your entry price for buying a particular stock, your exit price and an escape price — also known as a stop loss.

2. Misusing Margin

If there is anything that can destroy a day trader’s account, it’s margin. That’s when you borrow from a broker to buy securities. If used properly, margin is a valuable tool that can boost profits and give traders breathing room. When margin is used improperly, financing a trade with borrowed money can be dangerous to your wealth. In the past, many people misused margin, borrowing more from the brokerage than they could afford. It wiped out some traders’ accounts and helped to give day trading a bad name. It’s best to day trade with money you actually have, not money you borrowed.

3. Chasing Trades

One of the most common day-trading errors is chasing a fast-moving stock on the way up or down. More than likely, this could lead to an unprofitable trade. “When we see a stock go higher and higher, we all want to join in the celebration,” Turner says. “The problem is that experienced traders are going out the back door while new traders are coming in.” If you miss a stock on the way up or down, let it go. There will be other trading opportunities.

4. Not Understanding Market and Limit Orders

Not everyone agrees on which is best — market orders or limit orders. A market order is an order to buy or sell a stock at the current market price. With a limit order, you can establish your maximum or minimum price for trading a security. Market orders get filled fast, but you let the market control your order. Conversely, limit orders allow you to control the parameters.

“Now that spreads are a penny or two on many stocks, limit orders make no sense,” says Deron Wagner, founder and head trader of Morpheus Trading Group. “You could miss a fast-moving stock just to save a few cents.” With high-quality liquid stocks, you can use either a market or limit order.

5. Listening to Tips

At least once, nearly every trader gets fooled into buying stocks based on tips from persuasive sources. Even when the tipsters are right, they aren’t there to tell you when to sell. It takes a lot of self-control to keep your ears closed, but successful day traders rely on their own judgment — not on what others are saying.

6. Refusing to Cut Losses

It’s human nature to hope that a losing stock turns around. But if you’re a day trader, refusing to cut losses can damage your account. “Instead of hoping for a stock to go back up, take that money and transfer it into a stock that is really going up,” says day trader John Kurisko, host of Day Trading Radio. When a stock is headed south, be disciplined enough to prevent a small loss from turning into a much bigger one.

7. Trading Too Early or Too Late in the Day

The first and last 15 to 20 minutes of the trading day are usually chaotic, as market orders are filled from anxious investors rushing to make moves near the opening or closing bell. You also are competing with institutional and high-frequency traders. “The first and last 15 minutes are too volatile for new traders,” Kurisko says. “It’s like the Wild West, and sometimes there is no rhyme or reason to it. Also, the indicators don’t have enough data, so they get choppy.”

8. Letting Your Emotions Rule

What does it take to become a better trader? Discipline. “You need to develop a set of strict rules that takes the emotion out of a trade,” Kurisko says. “Most day traders use technical analysis.”

For example, Kurisko uses stochastics, an indicator used by many traders to determine if a stock is overbought or oversold. If the stock is oversold, then he starts to buy. “You must listen to the charts, not the news,” he adds.

9. Having Unrealistic Expectations

Some rookie day traders keep looking for something magical that will bring them easy profits. A few have already calculated how much money they plan to make in the market. Unfortunately, the market has other ideas. “Don’t seek a silver bullet,” Wagner says, “because there isn’t one. Some people will jump around looking for different instruments and strategies without taking an honest assessment of themselves. There is no easy way to play the market.” He says traders need a strategy, rules and discipline to become profitable.

10. Going Into day Trading Uneducated

Uninformed day traders think that anyone can make money day trading. But to be successful at it, you’ll need training. “If you were laying on the operating table, waiting for your surgeon to take out your appendix, you wouldn’t want that surgeon to walk in reading a pamphlet, ‘How to Remove an Appendix in 10 Easy Lessons,'” Turner says. She says to be a consistently winning trader, you should start with paper trades, and then study hard so you understand how the market works. “Learning to day trade successfully can take as long as going through college and obtaining a degree,” she says.

Trading Stocks with the Muppets

MIAMI, Fla. (MarketWatch) — Many investors were taken aback last month when an ex-Goldman Sachs executive revealed that clients were sometimes referred to as “muppets” in interoffice emails. If you know anything about Muppets, you’d know that being called a Muppet isn’t necessarily an insult.

As you’ll see, although most Muppets are terrible traders, at least one consistently makes money: Kermit the Frog

So if someone calls you a Muppet, they could mean you’re like Kermit the Frog. This cool, levelheaded Muppet with the wide mouth has all the characteristics of a successful trader.

While other Muppets are losing their heads (and arms and legs), Kermit tries to think rationally. Sometimes Kermit gets annoyed when his Muppet friends play stupid pranks, but usually he remains calm under stressful conditions.

When trading stocks, Kermit has a trading plan, is unemotional, and is willing to take losses when a trade doesn’t work out as he planned. He’s one of the few Muppets that makes, and keeps, potential profits. (This is also why Miss Piggy loves him so much.)

Fraggled and rocked

Unfortunately, not all Muppets are like Kermit. In fact, the following Muppets have problems that prevent them from being successful traders.

1. Miss Piggy

When Miss Piggy trades stocks, she routinely blows up her account. Because Miss Piggy is arrogant and self-centered, she dreams of all the millions she’ll make without thinking what could go wrong. Even worse, Miss Piggy thinks she is smarter than the market, a common but deadly mistake. When she loses money, impatient Miss Piggy throws her phone, computer, and Kermit across the room. Miss Piggy blames everyone for her losses except herself. When not obsessing over Kermit, she falls in love with her favorite stock and never sells. Whatever you do, please don’t trade like Miss Piggy.

2. Gonzo the Great

Gonzo the Great, a Muppet with blue fur, bug eyes, and a long, crooked nose, is almost as vain as Miss Piggy. It’s okay to be confident, but Gonzo is overconfident, which almost always leads to disaster. Even worse, he can’t figure out why he isn’t successful.

When trading stocks, Gonzo goes on margin without appreciating how leverage can accelerate losses. Because Gonzo is certain he is right, he never plans for worst-case scenarios, and refuses to use stop losses, or cut any losses. Although Gonzo has admirable qualities, such as never giving up, he always makes the same mistakes, and never analyzes what he did wrong. If someone says that you trade like Gonzo, you should be offended.

3. Beaker

Another highly emotional Muppet is Beaker, who has googly eyes and fluffy red hair that sticks up. He is constantly panicked about the market, and never stops frowning. For the last three years, he’s been shorting stocks, and always expects the worst. Sadly, Beaker’s life is a self-fulfilling prophecy, because terrible things always happen to him. He’s been electrocuted, flattened, blown up, and eaten by other Muppets. Beaker loses money because he’s always trading scared. Instead of letting winning trades run, he always gets out of his positions too soon.

4. Beauregard

Beauregard is one of most dimwitted Muppets, so he almost always loses money. He’s lovable and naive and always tries his best, but not without screwing things up. When trading stocks, Beauregard listens to tips from other Muppets, who tend to take advantage of him. Beauregard also feels pressured to trade, and because he doesn’t think for himself, usually ends up on the losing side. If Beauregard ever retires with a 401k, he should let an honest Muppet like Kermit manage his account.

5. Count von Count

Like many Muppets, Count von Count has some valuable traits. In his case, he is a top-notch mathematician. The problem is that he doesn’t just count, but obsessively counts everything, including himself. In the trading world, this is referred to as “analysis paralysis.” Because The Count is constantly counting how much he may make or lose, he freezes when it’s time to make a trade.

6. Beautiful Day Monster

Although it’s always good to buy stocks at the lowest possible price, the pessimistic Beautiful Day Monster constantly asks, “You got anything cheaper?” Unfortunately, he never accepts “yes” for an answer, and never makes the trade. Beautiful Day Monster knows the price of everything but the value of nothing. Because Beautiful Day Monster is so cheap, the other Muppets get so angry that they stomp his head in.

7. Cookie Monster

Although this Muppet monster with blue fur loves to gobble cookies, he is too greedy. As a result, he refuses to take gains, and even his profitable trades turn into losses. Greedy traders like the Cookie Monster are willing to risk their entire position just to make a few extra pennies, and end up losing money. It also isn’t healthy to eat cookies all day, and traders must be careful not to overindulge when sitting at their desks.

8. Animal

Almost as unstable as Miss Piggy is the outrageous Animal, who shouldn’t be allowed near a trading terminal. Animal, inspired by drummer Keith Moon of The Who, grunts and yells and often has emotional outbursts. Animal doesn’t have a trading plan, and even if he did, he’d ignore it. His worst trait is he is impatient and emotional, which causes him to lose money.

A Muppet ending

It’s not easy making money when you’re a Muppet, primarily because there are so many distractions. Fortunately, the Muppets also have a friend, Rowlf, who helps them with their trading decisions. This piano-playing pooch doesn’t bark or raise his voice, and listens patiently when the other Muppets have problems. Advice to all Muppet traders: it’s okay to make mistakes, and a good friend like Rowlf will make sure you don’t repeat them.

Michael Sincere is the author of Start Day Trading Now (Adams Media, 2011), All About Market Indicators (McGraw-Hill, 2010), and Understanding Stocks (McGraw-Hill, 2003).

Don't Trade Stocks Like these Muppets

My latest article for Marketwatch.com on the one Muppet that trades well, and the eight Muppets that lose money 🙂

Many investors were taken aback last month when an ex-Goldman Sachs executive revealed that clients were sometimes referred to as “muppets” in interoffice emails. If you know anything about Muppets, you’d know that being called a Muppet isn’t necessarily an insult.  http://bit.ly/HIMU0j