One of the biggest mistakes you can make when day trading is to enter/exit trades randomly. While this may seem like common sense, it might surprise you to know that many traders trade just this way.
While entering randomly is bad, random exits will, invariably, lead to the demise of your account and, likely, to your day trading career.
There are tons of “experiments” online that show the profitability of a random entry combined with a clearly defined stop. I have actually run a similar type of calculation to prove it to myself… and it’s definitely true… the tighter your stop loss (all else equal) the more profitable your trading.
The other side of that equation is your profit taking exits… aka your target or targets. Because of intraday volatility the idea of buying and holding until day’s end is more often than not a mirage.
Often traders who enter random trades are doing it for a few specific reasons. One common reason is that they may have just lost a large amount of money on their last trade. They’re in revenge or "getting their money back" mode, and as such likely just entered at the absolute wrong time. The other side of the terrible entry is the random exit that’s for any reason other than having reached a predetermined target that delivers positive expectancy (another term we will spend some time on).
Another common reason for a random entry/exit is simple boredom (also known as boredom trading). The trader may feel like they simply "need" to take a trade. And even more common, some traders will enter/exit the market simply because they have no entry/exit rules and therefore go by "feel."
Again… unless trades are taken with specific entry and exit parameters (whether that be profit taking or a stop loss exit), it’s only a matter of time before your trading comes crashing down.
While the emotional part of trading can get you to do very foolish things, having concrete parameters for entering and exiting trades can help override these urges… if you stick to said parameters.
Once you find a profitable system that you like, it’s your job as a trader to remain disciplined and stick to it (I talk more about discipline in the Emotional CapitalTM section of this course). One thing you can do is to write out your trading plan, and post the rules/steps in plain sight near your trading monitor. In theory, this should keep those rules in the front of your mind, and make you think twice about taking random or poorly thought-out entries/exits.
While posting these rules seems like a minor thing, during the "heat of battle" you may find that the little reminder that you get for posting this set of rules may just save/make you quite a bit of money during the day.
Of course, the most important part of this is that you have a concrete set of parameters for your entries and exits. This can be done through system testing, and simple observation of what works for you. If you do not have concrete rules, you are doomed to fail from the very start. By posting your trading rules in plain sight, you’ll increase your odds of finding day trading success.
