Many people are attracted to the idea of trading stocks as a way to earn a considerable income on their initial investment. While this is perfectly possible, there are a few mistakes that are easy to make but also easy to avoid if you know how to prepare yourself.
It's True What They Say About Failing to Plan:
Image via Flickr by Marco Arment
There may be no guarantees when it comes to day trading, but relying on luck is the riskiest strategy going. Before you even consider entering the stock market, you need to learn about trading and understand how the markets work.
You will need to identify what kind of stocks you will be looking for and formulate a strategy for how to manage your investments to maximize your return and minimize the risks. Research the companies you want to invest in and check their complaints history with state regulators or the SEC. It's not enough just to have a vague idea about what you think you will do; write down your plan, including as much detail as you can.
Don't Deviate From Your Strategy:
Once you have done your research and devised your rulebook to optimize your success, don't let yourself be panicked into changing tactics at the last minute or letting your emotions get the better of you.
Sticking to your stop-loss strategy can make the difference between losing everything in a market crash and coming out on top despite unfavorable conditions. You should have a plan for everything that can happen, both good and bad, and never fall into the trap of thinking "that won't happen to me."
Don't Forget That Patience Can Be a Lucrative Virtue:
After all the research and planning, it's only natural to want to get started and make your first investment, but it is important to wait for the right trade and avoid jumping in when conditions aren't favorable. While you will never make money unless you take the plunge, there's nothing to be gained by compromising on your plan. You want to make sure that your first trade is one that will set you up for future success.
Don't Get Caught up in Fundamentals:
Inexperienced day traders might find themselves clinging to stock in a company where they believe the fundamentals look good, even when they appear to be losing ground. Convincing yourself that stock is sure to rally simply because you have faith in the company could see you losing out.
More experienced traders will learn that even with the best fundamentals, a market that is selling down will see even the price of the best stock falling. To succeed as a day trader, it is important to focus on the market signs rather than being swayed by the fundamentals of the company they are trading in.
Don't Leave Positions Open:
In order to make money from trading, you need to be able to respond to price changes quickly and every second can make a difference. Leaving positions open at the end of the day leaves you vulnerable to fluctuations which could leave you with significant losses.
With care and research, day trading can be a profitable venture.