What Mistakes Do Stock Market Day Traders Repeatedly Make?

Stock market day traders often fall into the same traps, leading to emotional upheavals and suboptimal trading decisions. In this article, we will explore a common but crucial mistake that almost all retail traders make, and how correcting this mistake can significantly increase emotional control and financial success. We will delve into the psychological aspects and real-life examples to better understand the impact of this behavioral flaw.

The Psychological Trap of Monitoring Profit and Loss

It might seem counterintuitive, but simply checking the profit and loss (PL) of a trade can distort your perception of reality and lead to emotional turmoil. This practice reinforces a fallacy that once a profit is seen, it's as good as secured—an illusion that can have devastating consequences when markets fluctuate.

Understanding the Mistake

Let's illustrate this with a concrete example. Imagine a day trader named Sohan who purchased 1000 shares of a company at 200 rupees each. Initially, the share price rises to 202 rupees, resulting in a profit of 2000 rupees. When the price increases further to 2034 rupees, his account shows a profit of 4000 rupees.

Here's where the psychological trap comes into play. Sohan's mind, having accepted the 4000 rupee profit, becomes reluctant to see any decrease. Even a slight drop to 204 rupees results in a profit of only 3000 rupees, sparking anxiety in his mind. Instead of adhering to a predefined stop loss or take profit strategy, he starts to focus on recovering the 1000 rupee loss from the initial profit.

The Emotional Rollercoaster Begins

The need to see a 4000 rupee profit again drives Sohan to hold onto the position, even as the share price fluctuates. A further decline of 50 paise brings the profit down to 2500 rupees. When the stock price rises back to 4000, Sohan is impressed by the upward movement and stays in the position, expecting further gains. However, the inevitable downturn occurs, and the profit plummets to 3000, then 2000, and so on.

The final outcome is often the trader holding onto the position until they are left with no profit or in a loss. This emotional journey is a costly one, both financially and emotionally.

Why This Approach Fails

The primary reason this approach fails is that it diverts attention from the underlying technical factors that determine the share price. Instead of focusing on the chart patterns, trend lines, and support and resistance levels, retail traders become emotionally attached to the PL figures. This focus leads to poor decision-making, as the trader's perception of the market is clouded by an emotional bias rather than objective analysis.

Emotional Control and Market Discipline

One of the essential principles of successful trading is maintaining emotional control. As a seasoned trader, I emphasize the importance of keeping the focus on the chart and technical analysis, rather than being swayed by the PL figures. By doing so, traders can make more rational and informed decisions that align with their trading strategy and risk management.

Conclusion

The mistake of monitoring profit and loss repeatedly is a significant emotional trap that most day traders fall into. By understanding the psychology behind this behavior and focusing on the underlying market dynamics, traders can regain control and make better decisions. If you are a day trader, consider revisiting your trading strategies to ensure that you are not falling into this common pitfall.

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