Day Trading Risks No One Talks About

Posted September 4, 2022

Last week the market took another dive and is testing a key support area. If you are following the market right now, you probably already know that the 3800 to 3900 level on the S&P 500 is a key level of support.

We are already near this area after the Fed lifted future interest rate expectations for next year once again the previous Friday.

This week they started to introduce the idea of a 4% Fed Funds rate by year end as the selling continued. The angle of descent is concerning.

The S&P 500 closed last week at around 3924 – just above a confluence of multiple supports including a 61.8% retracement of the move higher from the June lows. We could see this support break or a strong rebound starting next week.

So the timing of this post seemed spot on. During a bear market its even more important to be aware of the risks when day trading.

Today lets discuss some of the day trading risks no one seems to talk about online and the advantages of swing trading vs day trading.

Day Trading Risk #1 – Fat Fingering a Trade

When I first tried day trading many years ago I ran into this problem a few weeks later.

Instead of buying 100 shares of FSLR I bought a thousand shares. This of course magnifies your risk by a factor of 10.

When day trading, you have to act quickly and capture ideal entry points in stocks that are moving quickly. Get in too late and you are probably out of luck.

When swing trading, unlike day trading, you have plenty of time and its much harder to fat finger the order.

When day trading, the profits are so small, so you have to move quickly to get in (and out) of a trade and really nail the entry and exits. Sometimes you move so hastily that you fat finger the trade and enter the wrong order size.

Fortunately, I was trading an earnings gap when this happened on a great stock over $20 and it worked out quite nicely. Other times after entering the wrong order size it worked out poorly but the stocks traded just do not drop 10% in minutes or seconds so it ended up being just a minor loss.

Day Trading Disasters

Now imagine if this happens with a penny stock under $10 or sketchy IPO that often drops 10% or more in minutes or just seconds? That could be a disaster to your trading account and happens all the time.

This is one of the reasons this site focuses on swing trading great growth and UPOD stocks. Swing trading is where you hold for multiple days, weeks, or months and day trading is when you get in and out the same day.

So with swing trading, you have plenty of time to size up the trade, calculate your risk and number of shares to purchase after hours, double check the position size and have the order ready to go.

When you swing trade, you generally have fewer trades as well so this in turn lowers risk further because you enter much fewer orders over time. With each trade, you generally target a much larger profit as well when swing trading vs day trading.

Day Trading Risk #2 – Bag Holding Halts

Recently we saw a stock, again trading below $10, get halted as it was surging higher. Traders were strumming their fingers on their desktops waiting 10 minutes for the halt to be released.

They waited… and waited… and waited.

Later that day traders found out that it was not a 10 minute halt but the type of halt that has an indeterminate length of time.

It was halted for several weeks and later re-opened down over 40%.

Halts happen all the time in the penny stock world and sketchy IPOs and could not only lose you a lot of money but keep your trading capital on the sidelines for weeks or months.

Its even more risky when the stock does not have a multi-year uptrend established and just rose quickly above $10 for no reason.

How to Reduce Risk – Avoid Flying Excrement

The remedy to reduce the trading risk of halts?

Trade better quality stocks again with better fundamental factors at ideal times and hold them longer. Stocks with real sales, earnings and strong growth. Or, at least strong sales or a biotech only after very important news is released that is very positive for the stock with a key trend confirmation signal already above key moving averages.

We can think of 2 times a stock in our alert service was halted after more than 10 years trading stocks. On one occasion, the stock was halted and re-opened about 10% higher and in the other instance the stock re-opened about 2.5% lower within a couple hours.

We have found holding great growth stocks overnight, in long-term uptrends, out of strong consolidations with very positive news is far less risky than day trading lower quality stocks. Stocks that are in a long-term uptrend where key news events have already been released with much better than expected news above a flat to rising 200 day moving average.

So know what you are trading. Trading flying crap generally leads to crappy results. Trade penny stocks and sketchy IPOs often and the unlucky number will be drawn soon enough.

Day Trading Risk #3 – Jeopardizing Your Job

When day trading penny stocks it can be difficult to focus on work. Penny stocks can crash quickly and its a wonder how anyone can work while trading these lower quality names.

Some just give the Nike response when you mention this and say “Just do it”. Learn how to multi-task they say and trade at work.

You can almost hear them say “It will make you a better a person and even grow hair on your chest. Make you more of a man!”

Really?

How is the boss going to feel when you are swearing at your desk while the latest pump and dump dives 50% lower suddenly? Its tough to concentrate on a career while worrying when your penny stock or sketchy recent IPO is about to crash.

When you trade a great stock with a great catalyst its much easier. You have your stop and your limit order in and can just let the trade play out. Check the news in late evening or early morning and sleep a lot easier.

Trading lower quality stocks can almost guarantee an account blowup at some point. Penny stock chatroom operators have their own personal blowup stories and wear them like a badge of honor.

But a lower win rate, more volatility and more risk generally leads to very poor results long-term unless you can and feel comfortable manipulating low float penny stocks. This is why we avoid nearly all penny stocks.

Day Trading Risk #4 – Trading a More Difficult Asset

To reduce the risk of their day trading strategy affecting their job, many newer traders turn to the Forex market.

In a recent article, it was disclosed that only about 1% of Forex traders are successful long-term. Trading is a challenge but I know my odds are a lot better trading stocks and futures.

Again, swing trading higher quality stocks is the way to go during most market conditions in our opinion. However, when volatility is high and the market is going into or already in a bear market, trading the overall market averages is a good way to go.

I would certainly choose that over Forex any day.

Again, you can look for great technical patterns in the direction of the longer-term trend with a fresh catalyst when trading futures, spy, qqqs emini and other ways to trade the overall market.

Last Friday after the Fed speech was a good example of this. You had the long-term trend moving lower, a 1-2-3 trend change back to the downside after the counter-trend rally failed near the 200 day and a fresh bearish catalyst that was worse than expected. A good combination to short the overall market.

Of course you can also swing trade stocks with rapidly deteriorating fundamentals short or with put options. The only trade in the Daily Alert service that reached the entry trigger from last week was a short that has already made a nice move in our direction since reaching the entry trigger listed in the service.

What to Do Next in Your Trading Journey

These are just a few of the risks of day trading no one seems to focus on online and why we believe swing trading better quality stocks is the best route for most. It can easily be executed while working a full time job, the stocks are rarely halted, and you have plenty of time to double check your order accuracy before entering it.

In a prior article we go over a lot of the basics for risk management. Things you should know.

Managing risk is critical for your long-term success. The following video will help you get started with risk management