Day Trading Assumptions

There are some day trading assumptions that create additional and unnecessary risk for the trader. One of those is often referred to as ‘bottom fishing”. This is when the price of a stock is particularly low and the trader makes the assumption that “price must go up”. If you’ve ever attempted this, then you know that price can indeed go lower and that there is a reason why price is so low. The opposite is also true. Although I’ve never heard a name for it, we’ll call it “dove hunting”. The idea here is that “price must come down”. The day trader who sees a high flying stock will often assume that price will fall and so they short the stock.

There are a couple of problems with this right off the bat. First, the trade entry is not based on a strategy or a technical set up (usually). Instead, it is based on this simple assumption that price must come down. The second problem is that, lacking a strategy for steering the trade, the trader turns to their emotions for making future decisions about the trade.

Now why would a trader think that this is a good decision?

My theory is that, somewhere in the trader’s history, they made a similar play or saw someone else who made a similar play and they are imagining a point in the future where it might also happen to them on this trade. Their ego-hero is sitting on their shoulder and whispering “wouldn’t it be great if you shorted it up here and then it fell 5%?”

So the trader enters the trade based on a weak day trading assumption and prodded into action by the ego wishing to become the star of the show. Since they have no strategy in place for making this trade, they also have no strategy for exiting the trade if it moves against them. Therefore, they will often add to their error and hope to get lucky (so the ego isn’t proven wrong) by adding to their short position. The basis for their subsequent actions is to not embarrass the ego and all trade decisions become based on their emotions. Rather than asking “what is price telling me”, they ask “what trading action will make me feel better”. Emotions take center strategy while strategy was left behind a long time ago.

This would be like driving a car on a winding road and just assuming that the road is going to continue straight.

Big mistake!

The result, unfortunately, is that the trader becomes strung out on this emotional roller coaster. Every slight dip gives them hope and every slight rise in price gives them a sense of personnel failure. They ride this emotional roller-coaster and they may even kick the nightmare to the curb (so the ego isn’t proven to be “wrong”) by holding the day trade overnight and thereby hoping that the trade will eventually work out in their favor.

The key take-away from this article is that day trading is risky when you combine false assumptions, a lack of strategy, and emotion-based trading. The good news is that traders can do things to change all three of these elements.

The following video gives a very specific example of what I’m talking about in this article.

Day Trading Assumptions Video: