Most Common Intraday Trading Mistakes to Avoid

Intraday Trading Without a Plan

This is the biggest intraday trading mistake. Without a plan, no real preparation or research has been done on what works and what doesn’t. So, how can we plan?

A trading plan lays out under what conditions you enter, and under what conditions you will exit, for both profitable and losing trades. A trading plan also covers how much you can lose per trade, which is part of risk management (which will be covered later in the article).

The trick here is not to decide in the moment where to get in and where to get out. Building a trading plan means studying historical charts and looking for common patterns or tendencies in the price. By looking through historical charts you can start to see where you could enter and get out, for a profit, using rules you define.

Find at least 50 historical trades based on the entry and exit method you choose. Add up all the profits and losses to see if this trading strategy idea is profitable or not. If it is, now you have a plan that actually has some evidence behind it that it can produce a profit. It may need some tweaks, but you’re off to a good start.

Not every trade will win — but they don’t have to. Even winning 40% or 50% of trades can create big profits if wins are bigger than losses. After doing this work, only then consider intraday trading using the method. I would also recommend practicing trading the method in a demo account before trading real capital.

Intraday Trading Without Understanding Risk/Reward

In the trading plan section above, I discussed coming up with rules for when you get out of both profitable and losing trades. This dynamic creates what we call a risk/reward ratio. You want a favorable risk/reward to profit consistently.

Nearly all successful traders have a higher reward than risk. Assume you take an intraday trade in a stock. You buy it at 29.10 and place a stop loss 0.10 below at 29. Managing risk is key. This can be accomplished using a stop loss order. If the price reaches the stop loss price, the trade is closed.

This means you are risking 0.10 per share on this trade. Where should you take profit? On average, you will need to take profits that are larger than your stop loss. If your stop loss is 0.10, consider placing a target (an order to get out with a profit) at 0.20, 0.25, or 0.30 from the entry price, for example.

This means if you lose, you lose 0.10, but if you win, you make 0.20 to 0.30 per share. When wins are bigger than losses, you don’t need to be right all the time. If your wins are three times as big as your losses, you will make a profit even if you win only 30% of the time.

Not Understanding Intraday Trading Movement

Another common mistake is not analyzing current intraday price movement before placing day trades. Here’s how to do it.

Above, we discussed a trade example where the risk is 0.10 and the profit is 0.25 per share. It could just as easily be risk 1.0 to make 2.5 per share. In theory that is great, because if we win we will make a much bigger profit than our risk.

But what if that stock only moves 1.0 in an entire day? Will it be able to hit our target that is 2.5 away? Not likely, but it is likely to hit our stop loss. Maybe it won’t hit either one, and we will need to close the position when we are done trading at some random price.

You want your target inside typical movement, meaning it could be easily hit based on what the stocks, forex, options, commodity, index, CFD, or cryptocurrency usually does.

If you are holding your positions most of the day, look at statistics like Average True Range (ATR) to determine how much an asset moves in a day, on average. Better yet, look at your specific time frame you are trading.

How far are price waves running before they pullback or reverse? If the price moved up 0.50 after the open, then pulled back 0.20 and is now starting to move up again, what does that tell you? If you want to enter, and get out before the next pullback, your target had better be inside 0.50.

To be conservative, put the target 0.25 or 0.30 away. Your target is within reach of movement you have already witnessed. Now, if you can find yourself a nice entry with a stop loss of 0.10, for example, you have a nice risk/reward.

Intraday Trading Without Position Size Rules

Another common mistake intraday traders make is either under- or over-utilizing their capital. This is called position size. Here’s how to calculate position size.

When you take a trade, ideally you don’t buy or short a random number of shares, lots, or contracts. Good position sizing is based on a formula.

This site provides a position size calculator, which is a great tool to get you started on using your capital efficiently. To figure out your ideal position size you need to know a few things:

1. Your account size
2. The difference between your entry and stop loss
3. How much of your account you are willing to risk per trade

The first one is easy; just look at your account balance (assuming you are willing to trade it all). The second one is also easy, once you know your entry price and stop loss. What is the price difference between them? The third is personal. It can be a dollar amount, or a percentage. Keep in mind, most experienced trades risk 1% or less of their account on each trade.

Let’s go through a quick example. You want to enter a stock trade at 17.70 and you are going to put a stop loss at 17.60. You have a $15,000 account (there are ways to avoid the stock market pattern day trading rule if you are in the US) and are willing to risk 0.5% of the account per trade.

Position size = Account risk / trade risk

Position size = (0.5% x 15,000) / (17.70 – 17.60)

Position size = 75 / 0.10

Position size = 750 shares

That is the perfect position size for the risk you are taking on the trade, and what you are comfortable losing if the trade doesn’t work out.

No Work on the Mental Game

All of your trading success is based on what happens between your ears. After all, your brain filters every piece of information you come across, as well as your emotions, values, and beliefs.

These affect every action you take. Therefore, the mental work is as important as developing a winning strategy.

You’ll hear many false day trading prophets say that you can’t be emotional while you trade, or that you have to trade like a robot. That’s not true. We are humans; emotions are fine.

But you will need to learn how to handle your own emotions as it relates to trading. For example, in my early days, I would get frustrated after losing a trade. I realized this, and also realized that if I didn’t get up from my desk for a few minutes, my anger would probably make me try to revenge-trade — resulting in me losing more money.

I decided that if I took a loss and felt angry, I would get up and take a five minute break. I didn’t let myself trade until I felt calm and ready to follow my plan again. Over time, doing this eventually lessened my anger at losing, and now losing trades don’t affect me much. If I do feel anger creeping in, I still take a break.

There is no perfect prescription for everyone; rather, great traders note when their emotions are causing issues, and they develop protocols to limit the damage.

It’s a big intraday trading mistake to ignore your feelings. Jot down on a note pad what you are feeling while you trade, and how those emotions affect you. Take a break if it is affecting you negatively (resulting in you not being able to follow your plan). Then, outside of trading, brainstorm ways you can deal with this. Ignoring emotions won’t make the problem go away. Find a solution.