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In recent years, day trading has witnessed an increase in investors, as it offers an opportunity to make supplemental income trading financial assets. But according to a study by the US Securities and Exchange Commission, on average, 70% of retail forex traders lose money each quarter and end up losing their entire investment within the first year.
But why is that?
Day traders lose money or fail due to having the wrong mindset about day trading, overconfidence, taking enormous risks, and failing to identify the right stocks. Also, these traders may have tried to get rich quickly, thus timing the market and failing to stick to a well-defined trading strategy.
When day trading it’s easy to feel like you are always just one step away from winning so you keep going back and trying over and over again and continually losing money.
If you “know” something is going to hit you aren’t a day trader… you are a stock gambler. If you “got a tip” you aren’t a day trader you are a stock gambler.
Many people will trade based on feelings and hopes rather than actual plans and that is why so many people fail to make it as a day trader.
In this article I will discuss why a lot of day traders lose money or fail to make money. Read on to discover tips on how you can avoid doing the same.
Why and How Day Traders Lose Money
Did you know that more than 75% of all day traders call it quits within a mere two years of trading? While there are successful day traders who make money consistently, day trading is not as easy as many traders think.
It is challenging and comes with a higher tax bill than the buy and hold strategy practiced by long-term investors.
Let us examine in further detail why day traders lose money or fail to make any money in day trading and how they do it.
Traders Lose Money Because They Lack the Right Trading Mentality
A majority of day traders believe day trading is a chance to get rich quickly. As such, they take huge risks on volatile assets.
While they might make money initially, a single bad trade often results in considerable losses. Trading apps like Robinhood also make day trading seem relatively easy; hence more and more traders are keen to try it out but fail, often miserably.
In addition to an incorrect mindset, some individuals think they can make money quickly and easily, trading from the comfort of their home, on the phone, or computer. Besides, they feel they can beat the market by following online trading gurus promoting their trading system.
Some Day Traders Do Not Adopt a Long-Term Perspective
It is essential to note that making money in the stock market requires a long-term trading perspective. Historically, stocks have proven that you can create wealth if you are consistent and commit to a timeframe of 30+ years.
Conversely, shorter time frames like those found in day trading are susceptible to various market forces.
Again, the average retail trader is no match for day trading algorithms or the vast resources and speed employed by professionals, institutional investors, and hedge funds.
Not All Day Traders Are Good at Picking the Right Stocks
To make money in stocks, you need to select the kind of stocks that will sky-rocket. But that is not all; the timing has to be right.
Unfortunately, most day traders either follow the crowds or chase performance, often going for particular stocks. While such actions lead to steep price spikes, they are usually followed by negative returns.
Generally, some active day traders make profits over just a few days out of the year while the majority underperform. This means failure to trade on some days could make you miss out on a large portion of the year’s profits.
Therefore, consistency is essential.
Some Day Traders Are Overconfident
While the likelihood of losing money in stocks is pretty high, many unskilled day traders are overconfident about their trading abilities. As a result, they believe they only need to be more aggressive, hence taking bigger risks and losing incredible amounts of money.
And when most of them are successful, they attribute it primarily to their skills rather than mere luck, a phenomenon known as random reinforcement.
Consequently, many day traders attribute failure and loss to bad luck, downplay their losses, and are often more keen to continue trading after failing.
Overconfidence can cause you to jump into trades without due diligence, overstay in a trade or find it hard to admit you were wrong.
Many Day Traders Take on Unreasonable Huge Risks
In a bid to attain higher returns, day traders are highly likely to undertake risky investments. Others with little investment capital opt to take a single but significant amount of risk to try to make a considerable profit at once.
Unfortunately, high risks equal high potential loss, which is the case more often than not.
How To Avoid Losses in Day Trading
You can make a significant amount of money in day trading if you follow the correct principles. So, to help you avoid massive losses when engaging in day trading, here are some helpful guidelines:
- Take regular profits.
- Diversify your stock holdings.
- Choose stocks featuring medium to high volatility and ample liquidity.
- Avoid timing the market and use tested trading strategies instead.
- Stick to a well-defined strategy even when the going gets rough.
- Manage your emotions and avoid giving in to fear, greed, regret, or unending hope.
- Approach day trading with a plan, only risking a small percentage of your capital per trade.
- Avoid following the crowd when selecting stocks; do your research.
- Avoid any emotional attachment to your stocks; trade the pattern using an objective analytical method.
- Keep yourself updated with industry news such as FDA announcements, earnings reports, economic data releases, and product launches to find opportunities for potential day trades.
Remember, even the most skilled stock traders suffer losses in the stock market. Therefore, experiencing a loss is not enough reason to abandon your strategy.
Explore the conditions behind the loss to help lessen the magnitude if similar circumstances were to happen in the future.
Many traders get into day trading with the false notion that there are easy profits to be made. Sadly, they find out the hard way that this is not the case.
Serious stock investing entails holding a diversified portfolio, being consistent, and avoiding market timing — characteristics that are rare for most day traders. It also requires skills that take years of experience to develop.
Avoid painful losses in day trading by doing your research and following proven trading skills. When done right, day trading could still earn you a substantial return.