Why Do Day Traders Fail? | Avoid These 7 Fatal Mistakes

There are many reasons why a day trader may fail. If you want to succeed as a day trader, you need to research as much as you can about the markets you are trading in and develop the expertise and knowledge to learn from your mistakes.

Stock market graphs on different devices

Investing solely in blue-chip companies or S&P 500 index funds can be boring because these assets are stable and have limited price action. For investors seeking action and high returns on their money, day trading is a lucrative and attractive alternative. So why do day traders fail?

Well, the reality is that most day traders lose money, fail to be consistently profitable, and will quit within the first two years. The good news is that there are profitable traders out there and you can be a successful trader too by putting in the effort and learning from your mistakes. Or, you can consider long-term investing benefits instead, take a buy and hold approach, and arm yourself with patience.

Key Takeaways

  • Day traders take advantage of short-term price movements by going in and out of trades many times within the same day.
  • 7 mistakes that day traders commonly make include:
    1. Believing that day trading is easy
    2. Not managing risk properly
    3. Letting emotions control them
    4. Not setting up trading strategies properly
    5. Overtrading
    6. Not following through with plans
    7. Giving in to FOMO

What Do Day Traders Do?

Day traders execute intraday trading strategies to make money off price changes of assets in the financial markets of their choice. This could be stocks, cryptocurrency, Forex, or another financial market.

They use many different methods to make decisions and take advantage of short-term price movements. Most of the time, they will make many trades in a day and open and close positions within the day. The majority of traders focus on short timeframes and will not keep any of their positions overnight. Day traders typically use technical analysis, which focuses on price trends and patterns, to determine when to enter and exit a position rather than fundamental analysis, which is more focused on analyzing the future value of a security and the benefits of investing in it.

What is the Success Rate of Day Traders?

According to Tradeciety, nearly 40% of day traders will only trade for one month, while 80% of day traders will quit within their first two years. Profitable traders only make up 1.6% of all traders in a given year but account for 12% of all day trading activity. About 1% of all day traders are able to consistently make profits net of fees.

7 Reason Why Day Traders Fail

A high number of traders will fail mostly due to a lack of education in the financial markets they are trading in and consistently making the same mistakes. While some mistakes and losses are inevitable even for the best traders, the key is to stay focused and create strategies that work best for you. Below are the 7 most common reasons why most day traders fail.

1. Belief That Day Trading is Easy

Because nobody likes to admit that their mistakes or failures, successful day traders tend to be more prominent and open about their profits compared to day traders who fail. This sweeps less successful traders under the rug and creates a false image that day trading is easy and anyone can do it. In reality, day trading takes a lot of hard work and research.

Many traders start trading without a proper understanding of how the market they are trading in works and how to set up trading strategies. They mistakenly believe they can just trade using intuition without putting in the time and dedication needed to successfully rely on intuition. By not taking the time to learn all the technicals and do test runs of different strategies, whether through trade simulations or paper trading, traders set themselves up for failure.

Similar to going to law school or medical school, day trading requires experience and knowledge. A common misconception that people have is that trading is a hobby or a side hustle. There is a lot of effort required to develop the expertise to consistently profit. Trading is a zero-sum game in that you are competing against professional day traders and hedge funds who use algorithms and resources not accessible to the average retail investor. While there are many people who are successful, it is important to build a strong foundation before trying to day trade with real money.

a woman trading on the cellphone

2. Lack of Risk Management

Risk management can make or break a trader. Trading and investing are all about knowing how to manage your risks. No matter what happens in the financial markets, you have to stay in control of your risk levels and make adjustments accordingly. The most successful traders are amazing at risk management and know how to balance their risk to reward ratio.

It is important to recognize that all investments will carry risks. If people could get high returns without any risks, then everyone would be actively day trading. If I was confident in my ability to become a profitable trader without paying any market tuition, I would not hesitate to quit my job today and focus exclusively on day trading. Before you start trading, you need to ask yourself the tough questions. How much risk are you willing to take on in order to make a profit? What are the potential upsides and downsides you will have from your trading strategy? How will you react if you make the wrong decision for a trade and end up losing money?

Everyone is susceptible to mismanaging risk, even professionals. Mark Spiegel, the head of a small hedge fund, revealed in 2020 that his fund had lost over $1 million from shorting Tesla. Ihor Dusaniwsky, S3 Partners’ head of predictive analytics, claimed that in the first 2 weeks of 2020, short sellers were down around $2.6 billion from shorting Tesla.

Common mistakes that traders make include putting too much capital into one position, failing to manage risk during a trade, and not practicing before using real money. While you may be tempted to go “all in” on a trade because you believe there is a huge upside, being able to step back and analyze the loss potential is crucial. The more money you put into a single trade, the more money you have to lose. If you take a huge gamble with capital that you cannot afford to lose, that can set you back immensely. If you do not know how to manage your risk, you will most likely end up losing money at some point.

Profit, Loss and Risk words crossed

3. Inability to Control Emotions

A key part of being a successful day trader is knowing how to control your emotions. Most people naturally trade based on emotions such as greed, fear, hope, and anger. When you let your emotions take control of your trading decisions, you expose yourself to a lot more risk, thus making it more likely for you to make mistakes and take greater losses. The best traders not only create trading strategies but also have strong emotional discipline and stick to their strict trading rules.

No matter how great your trading strategy is, it will only work if you are able to follow through. There have been many times when I tried to day trade or swing trade a position and ended up bagholding losses because I got too greedy or could not accept that I made a mistake. I bought into several momenta plays in the past and had high returns on paper, but I waited too long to exit my positions and ended up losing money instead. There were also a few risky trades I attempted in hopes of making a large profit, but I did not adjust my strategy to the market sentiment and ended up holding bags when everyone else started selling their positions.

A few things to look out for when making a trade include trend reversals, unusual trading volume, trendline breaks, and breaking news. These could affect the prices of the assets you are trading, so being aware of changes in these things will help you recognize when to let your winners run and when to pull back. If you fail to control your emotions, you can completely derail your trading strategy.

a concentrated man looking at the display of his laptop

4. Lack of a Trading Strategy

Day trading has often been referred to as a full-time job. So, like any job, you need to have an action plan of what you are going to do each day and know what you want to accomplish. Knowing what, when, and how are you going to trade is essential for success. A common issue that most day traders have is that they go into day trading without a solid and well-thought-out plan. Without having a set strategy in mind, it is almost impossible to be profitable.

The goal of a trading plan is to clearly define how you will approach the financial markets you are trading in. When designing your trading plan, you should establish a general guide of what you will do under different market conditions. Having a consistent strategy will help you stay focused and controlled so you do not panic if the market unexpectedly changes. The plan should also cover all the details of the trading process. What markets are you trading in? What strategies will you be using? What factors are important for your trades? This includes setting entry, exit, risk management, and trade management rules to follow. You should also state the timeframes you want to use to analyze your trades, whether that’s every ten minutes, twenty minutes, etc., and the position size of each trade. Lastly, keep track of all your trades so that you can review them in the future and see which areas you can improve on to make yourself more successful.

Some strategies you can build your plan on include things like moving averages, VWAP, MACD, and support and resistance. For example, many traders like to set trailing stop-losses for their trade at a certain percentage below the support levels and above the resistance levels. If the security they are trading hits the stop-loss they set up, they will sell no matter what. By doing this, they protect themselves from large losses while also allowing themselves to take profits.

magnifying glass over the graphs

5. Overtrading

Another major reason why day traders fail is due to overtrading. Research by Professors Brad Barber and Terrence Odean revealed that overtrading costs investors around 7% in returns on average per year. According to Barber and Odean, traders who are overly active may end up chasing returns in the short term and underperform in the long run. While the goal of day trading is to actively trade, too much trading will negatively impact your performance, so it is best to find the right balance.

For inexperienced day traders, understanding what is happening in the markets can be hard at times. If you focus only on charts, you will find many potentially profitable trading opportunities and may feel the need to make large-scale or frequent trades. However, as mentioned above, learning how to control your emotions and designing a strict and comprehensive trading plan will help prevent you from overtrading. For example, after losing on multiple trades, psychologically you may feel the need to compensate and end up making poor decisions. Similarly, if you are on a winning streak, you may become overconfident in your abilities and make subpar trades. Being able to control your fear and greed will go a long way.

If you find yourself overtrading, just remember that no one will care about how many trades you make in any given time period. At the end of the day, all people care about is your ability to make winning trades and take profits at the appropriate time. When I talk to my friends about day trading, I do not ask them how many trades they are making each day. Instead, I ask them what their returns are, how profitable their trades are, and how they decide when to make a trade. Instead of focusing on making as many trades as possible, focus on your strategy and making profitable trades.

a man slipped on graph arrows

6. Not Sticking to the Trading Plan

Many day traders like to try different trading strategies and styles to find out what works best for them. Different traders may be better at certain styles of trading, such as following current trends or looking for breakout or momentum trades. However, when testing different styles, it is important to familiarize yourself with the strategy you are using. If you do not spend enough time trying out a strategy, that could hurt you more than benefit you.

There is a lot of work that goes into trading. This is not something that can get learned in a day or two. By first understanding the basics, such as identifying trends and pullbacks, you can then figure out what you are best at and develop a strategy and style of trading that helps you be successful. Creating the right trading strategy for you will take many hours of research and testing. There will be failed attempts and successes along the way. Take a few weeks or months to test out a strategy to see if it works for you.

Once you get the hang of things and know what strategy you want to use, make sure to stay consistent and stick to it. As you gain more experience and expertise, keep fine-tuning your strategy over time to become more profitable. If you feel confident about your strategy, consider adding a new one under your belt.

a woman drawing a graph

7. Giving in to FOMO (Fear of Missing Out)

When you see everyone else around you succeeding and making bank, it’s easy to succumb to FOMO and join in, especially if you are part of active online communities on Discord, Reddit, Twitter, etc. Coming from someone who is in several Discord trading servers and actively lurks Wall Street Bets on Reddit, there have been several times where I jumped into a trade without knowing what I was getting into because I saw everyone else making money. Unsurprisingly, this led me to lose money and take a loss on the trades most of the time. While I managed my risk and only put in “fun” money, that was still capital that I lost because of FOMO.

Anyone can succumb to FOMO, especially in markets that are volatile and constantly changing. As retail traders, we cannot predict what happens in the markets. People have different views and predictions and act accordingly. For example, if you are bullish on a specific industry or sector, but you see the market continue to tank, that can erode your confidence and lead you to switch your position to follow the market trend.

In one of the Discord servers I am in, I have seen many inexperienced traders jump into trades without a basic understanding of technical analysis. They were just following other traders’ calls and it was clear that they had no idea what they were doing. While you may make some profits in the beginning, if you are solely relying on someone else’s calls to make your trades, you will eventually end up taking losses. The traders making the calls typically have their setups ready and in motion by the time they send out alerts to members. So, you may not be getting the best prices by the time you see the alerts. Being able to do your own due diligence and follow your own trading strategy will ensure that you have the best setup for your trades.

Emotions often play a huge role in the markets. However, you must resist them and stick to your plans. Do not jump into positions you are not confident in because you see everyone else doing that. Do not follow other traders because you feel like you will miss the train if you don’t. FOMO can cause you to make terrible decisions that you otherwise would not have made on your own.

red written FOMO on the large screen

Becoming a Successful Trader

The tips I gave above will hopefully set you on the right path towards becoming a successful day trader. However, you should continue to expand your knowledge on your own and build up your expertise and experience. The markets are constantly changing and there are endless things to learn.

In summary, some basic tips to follow include:

  1. Do your own due diligence. Make sure you research all your trades ahead of time.
  2. Take plenty of time to test different strategies and styles. You do not have to stick to one specific style of trading if you do not think it is a good fit for you.
  3. Create a trading strategy and stick with it. Just like how you use Google maps to navigate or a recipe to cook a dish, you need to go into your trades with a solid game plan.
  4. Manage your risk carefully. Do not overleverage your positions or put too much capital into a single position.
  5. Do not let FOMO get the best of you. Own your trades and follow through with your plans instead of being a sheep.
  6. Always keep your emotions in check. Do not let fear or greed take over.
  7. It’s not about the number of trades you make, but how profitable you are. Strike the right balance to make sure you do not overtrade.
  8. Keep track of all your trades, whether it is your successes or failures. Keeping a journal or Excel spreadsheet of all the relevant info will give you the opportunity to analyze your trades and refine them.
  9. Have confidence in yourself and own your trades!
We are not financial advisors. The content on this website and our YouTube videos are for educational purposes only and merely cite our own personal opinions. In order to make the best financial decision that suits your own needs, you must conduct your own research and seek the advice of a licensed financial advisor if necessary. Know that all investments involve some form of risk and there is no guarantee that you will be successful in making, saving, or investing money; nor is there any guarantee that you won't experience any loss when investing. Always remember to make smart decisions and do your own research!

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