Risks of Day Trading

An over looked mistake that beginner stock market investors make is not taking into consideration their share size and how it effects their ability to stay in the stock for a longer period while the stock shakes out novice traders.

The likelihood of a stock moving straight up or straight down after you have entered a stock trade is slim to none. What happens before the stock moves in the direction that it is bound to move, is that the stock will either, head lower if you anticipate an upward move, or the stock will stall.

If you are anticipating that the stock will head lower, the stock may trade side ways for a bit or it will head higher just to scare traders and allow for new traders to enter the stock as well.



When the stock behaves in this fashion, the beginner stock market trader begins to doubt themselves and the trading decision. What traders will usually do is stay in the trade as long as they can handle being out the money.

For example, lets assume that you entered a trade at $ 41.15 ad you anticipate that the trade will head up to $42 before the 3pm reversal time. You entered your trade with 1000 shares.

Two events are likely to occur: either the stock will retrace down to $41.00 or even lower, $40.80 at this price, you may begin to feel uncertainty at the stock ever reaching $42.

If the stock carries on with its retracement and goes down to $40.65, you now cannot handle the pressure and may exit the trade.

The other event that may happen is that the stock will just trade in a sideways manner before it head higher. At this point you see the slight jigs in a 10-15 cent range.

Your initial expectation was that the stock would make its move before the 3pm reversal time and now it is 2:55pm. You decide that the stock is not going to make the move and you sell the stock at a loss of 15 cents. You close out your trade.

In the first example you lost between 15-50cents on your trade. If you had limited the initial share position you would have lost only $75 in the second example and maybe on $200 in the first example.

The first example is interesting because if we assume that you initially entered the stock with 200 shares, and the stock proceeded to retrace down to 40.90 an astute trader would add another 200 shares to their trade and bring the average cost of their initial entry lower.

Then when the stock retraced further down to $40.70 the astute trader would again add to their position to further lower the initial price of their trade.

When the trade finally got to $40.65 and the trader decides that they would add another 2oo shares, even if the trade fails to become profitable and the trader decides to close out their position, because the price the trader paid for the share is lower using the averaging in method, a trader can protect more capital and lose less money than if they simply entered the trade with all 1000 shares at the price of $41.15.

However, if the trade became profitable, the trader would be able to add more shares at a lower average cost, let’s say this price was $40.80, this is 35c cheaper than their initial entry at $41.15.

The trade becomes profitable sooner and again helps to alleviate stress and allow the trader to manage their trade and not their heart rate.

This is why share sizing is so crucial to a stock trader’s success. Sometimes stocks don’t immediately give us the expected results that we were hoping for.

Sometimes stocks test our resilience and patience, however, if you know how to manage your trades and keep your average cost of stock as close to the bid or offer price you will more likely be successful and trade with a lot less stress than other novice trades who do not control their initial share size.

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