Highlights

• If you want to be a successful day trader, you’d better know what you’re doing.
• What do terms like margin and market order mean? Day traders need to know.
• If you’re day trading, knowing when to do it can be as important as knowing how.

Investing » 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.

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.