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Day-Trading Pitfalls and How to Endure: My Personal Experience

This article is based on my experience from over 45 years of perfecting my stock-trading strategies and risk-control skills.

I discovered the risks and learned how to avoid the pitfalls when day-trading stocks.

I discovered the risks and learned how to avoid the pitfalls when day-trading stocks.

You Need to Know How to Stay in the Game

I have over 45 years of experience buying stocks for the long-term, but when I first started day-trading, I discovered its pros and cons. I eventually learned the techniques that are crucial to staying in the game.

I'll teach you the risks involved and how to avoid them. We'll cover the following:

  1. The profit potential of day-trading.
  2. The difficulty with limit orders.
  3. How bid-ask spreads can hurt you.
  4. Taking advantage of short-term price fluctuations.
  5. Applying an exit strategy that leads to profits.

What Is the Profit Potential of Day-Trading?

Day-trading involves buying a stock and closing the position on the same day. The purpose is to take advantage of short-term price fluctuations.

When you trade for rapid price fluctuations, you need to take any profit quickly without being greedy for more. That is because it will have a 50% chance of going in the wrong direction at any time. And that is true from the start when you first enter a new trade.

Stocks can go up or down. There is no other direction. So the chance for a move in either direction is 50%. That's how statistics work.

Even if a stock goes sky-high and you think it will give some of that back, it still has a 50% chance of going higher. Statistically, all price fluctuations have a 50% chance of going in either direction.

When I started to day-trade, I went long when the trend was up, and I went short when the trend was down. That seemed simple enough.

But it didn't work. Half of my trades were consistently going in the wrong direction. Therefore, that would imply the profit potential of day-trading is only 50%.

I had to find a better way. So I researched the use of limit orders for my day trades. But first, it's vital to conserve resources so we can continue the process once we learn what works.

Conserve Your Resources

An important point to understand is that you must keep your trades small since some of them (possibly many) will be losers. If you trade too big or place too many positions at once, you could quickly run dry. Game Over!

Therefore it's crucial to conserve your resources by limiting the number of trades and their size.

The best way to do that is to allocate only the money you are willing to lose to your day-trading activity. Then, keep your trades small so that money doesn't get taken away from you in a single failing position.

Do Limit Orders Work With Day-Trading?

Limit orders always worked well for my long-term investments, so I tried using it with day-trading and applied it in the following way:

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  1. When I saw an upward trend, I went long with a limit order slightly lower than the current price. I thought I was giving myself the chance to get a better entry price because of the expected 50% price fluctuations.
  2. I also did the same thing in reverse. When I saw a downward trend, I went short, entering a limit order at a slightly higher entry than the current price. Again, I thought that I would get a better entry price.

That process didn't work because I was forcing my trades to wait for a reversal. Since my limit orders waited for a pull-back, the trades didn't execute until the trend reversed. Unfortunately, that reversal continued most of the time, going in the opposite direction from what I wanted.

The Ideal Solution

The ideal solution is to get into a trade immediately and stay with it while the stock is trending in the expected direction. However, that is tricky because you don't want to use a market order. Market makers will always give you the worst deal since you'd pay the asking price.

It's better to place a limit order between the bid and ask. However, notice that it is not the same as I explained earlier—placing limit orders above or below the current price, which was clearly not working.

So the best strategy is to get in at the current price in the direction of the trend using a limit order between the bid and ask. In other words, go long when the trend is upward and go short when the trend is down.

Placing trades between the bid and ask price takes work. You may need to adjust that somewhat to get quick execution before the trend reverses again. So let's review this strategy further.

The Correct Way to Use Limit Orders

I concluded that placing limit orders between the bid and ask is crucial to control the trade price. But to get in or out quickly, it's important to create those limit orders a little closer to the asking price on a long trade or closer to the bid price on a short trade.

When I started using that method, my trades moved in the right direction from the start more frequently. Of course, it’s not 100% certainty, but anything better than 50% puts the odds in your favor.

Understanding the Bid-Ask Spread

It helps to avoid stocks with a significant difference between the bid and ask prices. That's known as the spread, and if it's too big, it will increase your cost and lower your profit potential.

It's best to day-trade only with stocks with a narrow bid-ask spread. I'll explain that in more detail.

What Do Bid, Spread, and Ask Mean?

Bid<–– Spread ––>Ask

The price buyers are willing to pay.

The difference between the bid and the asking prices.

The price at which sellers are willing to sell.

Why You Need a Narrow Bid-Ask Spread

You need to day trade with small moves, taking profits quickly and not waiting for a home run. A wide bid-ask spread will cause trouble with that strategy because it delays the entry and exit, waiting for the price you want. But that price may never occur.

You never know which direction the short-term price fluctuations will take you. Therefore, it's essential to trade only where the spread between the bid and ask is minimal.

High-Frequency Trading of Short-Term Price Fluctuations

As I mentioned earlier, day-trading takes advantage of short-term price fluctuations. Therefore, professional day-traders focus on scalping small gains at a time.

The profits can add up with high-frequency trading. But prices can swing against you from the start of a trade and never recover. So remember that day-trading also involves closing each position by the end of the same day—even if it's a losing position. Doing so will avoid losing more overnight if it doesn't recover.

Stock price fluctuations can turn a winning trade into a losing one before you act on it to take your profits. I've learned several approaches to avoiding big losses:

  • Control your greed. Often when I had a profitable trade, I lost money because I was greedy and waited for more. Price fluctuations can turn a winning trade around very quickly. Greed is terrible in trading, and one needs to control that.
  • Take your losses. A position that turns against you can continue to slide down with a more considerable loss until you panic and get out at a much more significant loss. Therefore, it's better to have a strict rule for closing positions once a slight loss occurs.
  • Learn exit strategies. To turn the odds in favor of successful trades, the trick I learned is to control the exit strategy. So Let's review that next.

Applying an Exit Strategy That Leads to Profits

I learned to be diligent about taking profits, so I get out as soon as a trade becomes profitable, no matter how small.

If you do that repeatedly, you'll increase your success rate beyond 50%.

In addition, you need to manage risk and accept failure without letting emotions guide you. Therefore, it's crucial to understand these four rules:

  1. Take small profits when they occur without waiting for more just because you think the trend will continue. Remember that it always has only a 50% of moving in any direction.
  2. Decide how much loss you will accept and close a losing trade, so it doesn't get worse. Never overthink it. Just do it and close those positions!
  3. Avoid emotional trading by following a pre-determined reason for exiting a trade. Never let your emotions change that plan.
  4. Failure to admit when you are wrong will lead you to hope that the market will turn in your favor. If you can't control your emotions, then stay away from day-trading.

Key Takeaways

If you can be strict with yourself and remember these vital points, then day-trading can be an exciting experience.

  1. Enter and exit trades with a pre-determined plan.
  2. Admit when you're wrong, so you quickly get out of a bad trade.
  3. Keep your trades small to conserve your resources.
  4. The name of the game is the exit strategy.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2016 Glenn Stok


Glenn Stok (author) from Long Island, NY on November 21, 2016:

Nell Rose - If you're new to trading it would be helpful if you know someone who does this actively so you can work and learn side by side. There are a lot of things to understand in order to make this a success. I wrote a few hubs on various trading strategies. As you said, Nell, you never know. It's always enjoyable learning new things.

Nell Rose from England on November 21, 2016:

This is interesting, and not something I had thought would get my attention, but I may just go and take a look to see what it entails! you never!

Amy from East Coast on October 31, 2016:

Great article. I have had some positive experiences with day trading. Usually I go for popular strong companies. Very informative article. Lots of luck!

Glenn Stok (author) from Long Island, NY on October 30, 2016:

FlourishAnyway - Sounds like you've got it all worked out for diligent investing.

FlourishAnyway from USA on October 30, 2016:

I'm more of a short and long term investor but I manage to keep emotions completely in check and try not to over analyze my stock picks. Some people go way down deep into th weeds but I look at a couple of key numbers, and it has worked very well overall as an additional income generator.

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