Day Trading Behavior and Myths

 Written by Parth Mavani

 

"Day trading: The best job in the world." You can earn money while you are still sitting on your bed. It's a crazy lifestyle where you work for yourself, have tons of free time to travel, and so remotely available that you can work while on vacation in Goa sipping beer. Is this true?

 

If you have already started trading, you might have a gist of what I am trying to say here. Day trading sounds impressive, but it's too good to be true unless you know the game. It is because the Market is a wildfire and you may burn yourself and your money if you do not know how to dance with its fire. Hence. you should check your dance steps – analyze yourself and your attitude toward trading. Let me explain that to you, discussing a few negative behaviors and myths traders have that you should combat.

 

 

1.     Not understanding your capital.

For a while now, I have been noticing people sharing photos and stories of how they earned Lakhs in just a single day and became millionaires in a single day. The other day I saw a 14-year-old make 50,000 in day trading. On the other platform, there were stories of people retiring from a 9-5 job, earning twice by trading as they were getting paid in a week. The thing that we all are missing here was the capital they had when they started.

 

Let's take the example of a guy who made 1.5l in a day in options trading. He had posted his earnings on Instagram and Twitter. I was impressed, just like how you were, but I dug just a centimeter deeper. I saw he was holding a quantity of thousands at an average price of 350 in one option and a few others with similar quantities and prices. I calculated his initial investment to be around 70l. He made 1.5l investing 70l a day, about 3%. Now is that impressive as it sounds?

 

We usually compare the profits earned by others with our capital, then presume we could be doing better in the industry. That guy made 1.5l today; earning 3% is mediocre, but if I earn 300 with a capital of 10,000, is it not as impressive as his? Technically we earn the same present, but no one will care about my 300.

 

2.    Your risk ability and appetite

Traders often abuse their stop loss. The most important rule in trading is respecting your stop loss. Your risk appetite is what you can bear to lose in the market, and the ability is how much you lose. To explain better, you have the appetite to eat two (2) pizzas but the ability for four (4). If you have the will, you may even eat five (5), but your body can only bear two (2). If you don't respect your stop loss, you will lose more than you can afford to lose.

 

3.     Source – Trust me, bro!

The worst mistake anyone can make is not making his study when they receive a recommendation. When an adviser in telegram or WhatsApp tells you to go short on a particular stock. You should not trust it blindly. To put that in perspective, the advisor has a specific view and a risk appetite which can contradict your view and appetite. A small percentage gain would make him happy, but that percentage might not even cover your transaction cost. Make your view by analyzing the adviser's view. You won't even know it, but it will save you some money.

 

 

4.     Emotion or Revenge trading

As we are talking about studying your view on the market, this byproduct is your enemy, which is your emotion. I, myself, have been a target of this enemy. You should understand that the market doesn't move on your fingers. Your fingers should move where the market goes. Trading on emotion also means revenge trading. You might feel that you took the right trade even if a few indicators told you not to, that should not happen. Trusting your guts is good, but ignoring the red signs is foolish.  I'll tell you why you should not do it.

 

In an active stock, most hedge funds and institutional investors place their buy order just a few pips below your stop loss. As and when you are about to hit a stop loss, you will find a small signal of reversal. You might immediately take a buy call to seize the opportunity in a downtrend. That reversal is just a small up movement in filling these investors' buy orders. They might imminently sell it when the market view is the same, and you are trapped in that revenge trade.

 

 

5.     Not back-testing your strategy

This is something that almost everyone knows. When you create your strategy, let it be EMA, RSI, or whatever you understand best. At least do months of back-testing to understand your mistakes and errors in the game. It's because you won't lose money if your strategy doesn’t work. Having enough backtesting will also bring trust in your Strategy and you will be more confident when you trade.

 

6.     Losing an opportunity is more painful than losing your money.

We all say markets are risky, but what exactly is your Risk? It is painful when you see your portfolio in red, but it's even more distressing when your strategy worked, but you did not trade. That is what Risk is. The Risk you took to trust your strategy and take the trade. Hence, when you have enough knowledge and capital, take the risk to trade. Only when you master the things, I have enumerated can you trade more educated and efficiently.

 

 

Indeed, Day trading is the best job in the world, but the Market is a wildfire, and you may burn yourself and your money if you do not know how to control it. Hence keep in mind on how to combat these negative behavior traders have. In doing so, you master the steps to dance with its fire. However, will you stop if you still get blisters and burns? No. Remember, only if you burn your hands do you know the heat in the market.

 Losses happen, and your strategy will fail, but that's not your end. You have an unlimited opportunity in the Market to learn more and be a better trader tomorrow. Trust the process and, most importantly— Trust yourself.