So you are a few weeks into your day trading career, and you’ve probably watched your trading account go through a violent roller coaster ride. Rest assured, I was in the same shoes as you when I first started. And let me tell you, my roller coaster went straight down without a bounce, like a penny stock pump and dump.
Yes, it was a struggle the first year I started as a complete beginner. Now that I’ve been trading for over 7 years as a full-time day trader, I can finally reflect on every single mistake I made in the book.
In this blog, we’ll be talking about the 3 deadly day trading mistakes beginners make, especially in this current market environment.
Trading Mistake #1: Believing stocks can only go up
Trading mistake #1 believing stocks can only go up, or, as we called it in the past, to the moon!
I think this is a relatively new phenomenon we’ve been seeing since late 2020 and early 2021. In fact, I think all of this started in March 2020—in the middle of a pandemic. Investors were selling their stocks; the market went down 30%.
The FED’s money printer was on.
Then comes the biggest pump we’ve ever seen in the stock market. No, I’m not talking about the stock CEI; I’m talking about FED chairman Jerome Powell’s non-stop money printer.
With all the new money supply in the form of stimulus checks in the US and a similar thing in Canada called CERB, everyone, and their mom and dad started throwing money into the stock market.
We saw GameStop go from double digits to close to $500, followed by AMC from $4 to $70. And we see the same price surge in other asset classes like Dogecoin, Shiba Inu, and, of course, the granddaddy of all things flying to the moon—Bitcoin.
All of these insane gains naturally created a lot of FOMO in the market. You have media coverage hyping these moves up, and more publicity draws even more retail traders and investors to the market.
Pull back never comes? Is that true?
If you had only started following the market in 2021, you likely wouldn’t know what a pullback in prices really means. Sure, the S&P 500 had dipped from September to October of this year, but come on, on a weekly chart, that was nothing. You can barely even see any red. Do you see it?
This is great that so many traders are making money buying stocks on the way up. But the current market paints a false narrative that stocks only go up and never truly pull back or come crashing down.
For beginner day traders, this could be an extremely dangerous situation. Because many traders would enter into trades thinking about all the rewards, the upside, the Gucci bags, and the Lamborghini rains. All the while forgetting about risk management—what to do if the trade goes against them.
Don’t forget the risk management.
For every stock that recently went up to the moon, there was a great run-up, be it a Gamma squeeze, hyped-up Donald Trump SPAC deals, or everyone rooting for Dogecoin to hit $1. The chart always looks something like this.
First, you have the huge parabolic emotional buying on the way up. This is also where you get the most hype on social media and the most media attention, and you’ll hear your neighbors, who you never knew were interested in the stock market, suddenly hopping on the train.
Then comes the aftermath. Where we see the stock just bleed out. The highs after ATH just became lower and lower. The lows also become lower. You see the volume dropping off. And by evening, the stock had sold off 50% or even more from the highs.
And even when these asset classes make new lows, you don’t hear a lot of people talking about them anymore because the crowd has moved on to the next shiny thing, the next hot stock, or the next hot crypto that’s going to the moon. Unfortunately, many new traders or investors are left holding the bag.
I’ve been there myself, holding many bags. And let me tell you, these are not fancy bags like Gucci or Louis Vuitton; these are Forever 21, H&M, Hertz bags, or even Luckin Coffee if they even had bags.
So, if you are a new trader, just understand that there is nothing wrong with trading these momentum stocks on the way up. Just keep riding that gravy train. But you have to be smart and know when to bail the ship when the momentum dies because what goes up must come down eventually, unless it’s Tesla, because clearly, gravity doesn’t apply to Elon Musk.
Trading Mistake 2: See day trading as a get-rich-quick scheme
The second deadly mistake I see a lot of new traders making is treating day trading as a get-rich-quick scheme. I know, I know, this might be an unpopular opinion, but becoming a profitable day trader definitely takes a little bit more than some winning text alerts and some Lamborghini motivational posts on Instagram.
But hey, if social media can teach us that stocks only go up, it only makes sense that it also teaches us that day trading is easy money, right? Wrong.
I was definitely guilty of this myself when I first started trading 7 years ago. At the time, I just wanted to make a quick couple thousand dollars so I could go to EDC VIP and party throughout the weekend in style with my friends in Vegas.
I thought these buy-and-sell alerts were going to be the answer, my easy money-making plan. Well, needless to say, I pretty much lost my entire small account doing so. That’s why I’m cautioning new traders against the following: buy and sell alerts, signals, copy trading, or anything like that.
Never trade without a plan.
First of all, most of the time, new traders get into positions without learning the thought process or the thesis behind why they should do so, or how to manage their positions if the trade goes against them. This creates followers, also known as sheep, who blindly buy in without any plan. When the stock goes down soon after, they panic, and they market order out for a huge loss.
There’s a saying that goes something like, “Failing to plan is planning to fail.” Sure, you could be lucky and make money from these alerts once in a while. But in the long run, being a follower will drain your account, especially if you are in low-float penny stock chat rooms with thousands of followers. These are what we call chat room pumps.
I’m very ashamed to say that in my first year of trading, I have tried out many different penny stock chat rooms and have seen instances like these firsthand. But looking back, I think I deserved it. I deserved to blow up my small trading accounts because I wanted that fast cash without the work. I bought into the dream of thinking I could make millions just by following what these people are buying and selling and making that easy cash.
But don’t worry; I still went to EDC. Instead of VIP, I paid for the general ticket and used the disgusting portal potties. And instead of the fancy president’s suite, I was on the floor. Good times.
Trading Mistake 3: Jumping left and right for the secret strategy
The third mistake many new traders make is always jumping left and right for the secret strategy, or the 99% win rate strategy, that they can follow with very little loss.
I see new traders trying all sorts of trading strategies. They go from A to B this week and to C tomorrow. The moment they lose some money in one, they decide, “Oh, it’s the strategy that’s not working. I should go find the next one on YouTube or TikTok.”
There’s no perfect trading strategy.
I’m just going to break it to you here. Trading strategies require risk, and of course, risk management. You could have a 90% win rate strategy, but if you don’t follow the stop losses 10% of the time the setup fails, you could still blow up your account.
And it is the same thing the other way around. You could have a 40% win rate strategy. But if all your losers are kept very small or at starter size, you can still become profitable.
And that’s the reason I always preach about risk management and taking calculated risks for your trading account. That means having potential risk-and-reward planned out beforehand and only taking shares that fit your account profile.
And you should find your trading strategy.
There are so many different trading strategies out there: the moving average cross, the RSI MACD strategy, buying breakouts, etc. Sure, all of those strategies could work on their own, but it is up to each individual trader to test out what works best for them.
In other words, it’s not just the strategy that determines whether a new trader is successful or not; the most important part is risk management. (And I can’t stress it enough!)
Making mistakes is a way to learn.
Trading is not easy, but it could be learned slowly if you put in the time and work. Let me know in the comments in the Youtube video if you’ve made any of these mistakes in the past. I was definitely guilty of doing so.
If you are interested in learning more about day trading as a complete beginner, feel free to check out the Humbled Trader Academy on my website.
Don’t feel like reading? Watch the video.