You are day trading one of your favorite stocks. Today feels like the day that stocks will make a massive gain. You're on the edge of your seat sipping coffee waiting for that golden moment when your gauge set turns 'green' with an entry signal. You wait, wait and wait. Trading is looking better and better with each passing minute. Without warning, the action begins to move. However, the operation did not reach the position expected. The stock moves higher and higher without letting up. In a panic, you enter a market order for a large position. The moment you enter the action, you are reeling and trading against you. How was this possible? It was almost as if someone had personally set you up.

The above scenario is common with new and even seasoned day traders. The problem is easy to identify but difficult to correct. What is the root of the commercial disaster?

Emotions and Trading

The brain is a complex machine that makes decisions based on logic, intuition, emotion, and millions of variables that cannot be defined in an automated trading program. The human element can be extremely profitable and cannot be imitated by a computer. Ironically, it is this very quality that inhibits many skilled traders. How can day traders learn to use their emotions to their advantage and not against them?

Limit Orders and Liquidity Addition

One of the worst mistakes a trader can make is chasing a stock. By the time the stock looks like a 'safe bet', it is usually setting up for a consolidation or price reversal. How can traders stop the useless practice of chasing a stock?

Market orders have their place in day trading. Day traders new to penny flipping stocks need to learn patience and discipline first. One way to control emotions is to trade with limit orders that add liquidity. If a new day trader forces himself to buy at the bid and sell short at the asking price, he will avoid chasing trades like a dog after a car. While it is possible for him to miss out on some trading opportunity, he will generally find limit orders executed to be generally more profitable.

Using limit orders to buy at the bid price and sell at the ask price will also increase profitability for new day traders due to ECN trade rebates. Even if the trade is flat or no capital gains, you can still have a positive net profit on the trade.

Join a system

Another problem in the opening example is not sticking to a trading system. While the trader had some indicators that he was watching, he also ignored them when his instincts told him otherwise. Complying with a system can be difficult. There will be many missed opportunities. A day trader cannot capitalize on every opportunity in the market, but he must pick and choose his trades. It can be frustrating when a big trade happens and you're not on board. But he must remember that for every losing trade that was profitable, there are also dozens of trades that would make him lose money.

Adhering to a system or set of indicators can be difficult. Sometimes you can clearly see an amazing trade but, for some reason or another, his system doesn't agree. That said, most traders know when they clearly ignored their system or when greed or fear overwhelmed them. Be honest with yourself. If you traded on emotion and ignored your system, punish yourself. Prohibit yourself from trading for a set period of time, such as 20 minutes. It will be painful but you must learn patience and discipline.

What else will help a trader stick to a plan? Write a checklist in advance. Look at the list and mentally check off the trading criteria before you buy or sell. This simple step could be just the reminder you need to keep emotional trading in check.

Trade with a team

One final tip to help a trader stick to a system is to trade with a partner. Chances are the other trader is not as emotionally attached to the trade as you are. Your business partner must know your rules and help you comply with them.

Some traders join online groups or physically trade in the same room as other people.

Day trading involves learning, practice and intuition. On the other hand, the trader needs to hone his discipline and control emotional trading. If new traders practice using limit orders, create a trade setup checklist and bounce potential trades with a partner, they can develop the iron discipline that the 'day traders of fame' possess.