Avoiding Potential Day-Trading Hazards


44 ratings




07 Jan, 2010

in Day Trading & Scalping and 1 more

If you were to ask most retail day-traders what is the most important factor for them when trading, there would probably be many different answers given. For me the most important and overriding consideration is the ability to close an open trade. For most people this does not go beyond setting a stop loss whether fixed or trailing.

However, there are many possible scenarios that could result in large losses being incurred if not catered for and in this article I will be discussing a number of these and how to overcome them.

Issue 1 - Loss of Power
A sudden loss of electrical power could cause a much bigger problem than you thought possible. If you are trading using a desktop computer and the power fails you could be in an open trade that you cannot now immediately close. In addition to this a desktop computer can incur serious damage if power is suddenly lost. You may think that if you have a laptop then you will be ok. It is true that you will not suffer the same potential damage to your pc because the battery will ensure continuity of power but you could still find you have lost internet connection because the modem is mains powered. You may decide to call your broker to close the trade but find that the hands free phone is also mains powered so has stopped working. So now you decide to call using your cell phone but cannot remember the number. This is not a problem as you decide to check what it is on their website but then remember you donít have internet access etc...

By the time you have found a way to close the trade, 15 minutes may have passed why which time the trade you were in is losing heavily. If you use a desktop to trade you may also find that there is additional damage even when the power comes back and it wont boot up or it has one of a number of other problems that can, (and do) occur. All of this happened because of a loss of power all of which could easily have been avoided.

Solution 1
Install an uninterruptible power supply (UPS) similar to the one in image below. I have my desktop, phone and modem all plugged into this and in the event of power loss (which has happened to me), I know that I have around 30 minutes in which to close any open trades and shut down my computer. They are not expensive and many perfectly good second user ones are available on eBay.

Issue 2 - Loss of Internet Connection
A sudden loss of internet connection when a trade is open can also result in an inability to close a trade quickly. This happens more often than many would believe and if you are not prepared for it then it can result in significant losses.

Solution 2
1) Purchase a USB Broadband modem similar to that shown in the image below.

I have one of these which costs me around £5 a month. I have tested how quickly I am able to reconnect to the internet and it is around 30 seconds. In the event of losing my main broadband internet connection I know that I am able to reconnect in under 1 minute and again this has happened to me when in a trade.

2) Have your broker number in speed dial position # 1 for both your landline and cell phone. I am always alarmed at how often I speak to traders that donít even know the number of their broker let alone know how to get it quickly. If you take the time to do this then if the situation arises where you need to use it then you know itís there and ready.

Issue 3 - Computer Reliability
Most people I know do little if any maintenance on their computer and I often wonder why. I am known for having very good skills with computers and as such I always have a steady stream of "desperate" individuals who suddenly find that they have a major problem with their computer. In most cases the problem is lack of maintenance and I am soon able to sort them out. That said if you are unfortunate enough to have a hard disk failure the consequences can be huge with a loss of trading data or studies that may have been conducted.

Solution 3
1) Regularly de-fragment your computer hard disk drive. A fragmented disk puts a much higher workload on your hard drive than one that is not fragmented and subsequently shortens the life of the hard drive. It also can slow down your computer very noticeably. This is because on a fragmented drive the information needed to run software applications is not located in an efficient manner and the disk is having to spin more to retrieve it. An analogy would be if you wanted to have a party with your friends but they were all located at their homes rather than at your house and you had to keep running from house to house continually to let each one know what others had said. Whilst Windows does provide a defrag facility, I prefer a stand alone one such as Diskeeper as it much more information. After just a week of trading, an analysis of my drive in the following images shows a reasonable level of fragmentation and that the reliability of my drive is degraded. The red shades show the fragmented files.


After defrag you can see that the red shades have gone and I also notice an improvement in speed.

2) Back up your hard drive. Again I am always surprised how often people do not do this and then have a problem that becomes a major cost in time and money in resolving. I have hundreds of trading studies and other indicators that I have developed over the years as well as specific setups. In the event of total data loss, I would struggle to remember exactly how I have done them and I could easily lose years of work. My preference is for an application such as Acronis True Image that allows disk cloning, standard backup as well as incremental backup. I always use a separate hard drive that is connected through the USB connection. In the event that I lose all data or that my hard drive failed, I can retrieve it all. I can even buy a new hard drive and clone my previous disk to it if necessary. It really is worth doing this and the cost of the likes of Acronis True Image is very affordable.

3) Use a "System Optimization" utility. This will improve the general performance of your computer and therefore make is more reliable and faster. There are many of these available such as TuneUp which is a fully featured application offering optimization of the registry, memory and hard drive fragmentation. There are also free versions such as ccleaner which will offer some of the functions but not all of those that come with commercial products.

Issue 4 - Online Security
If you are trading online then it is of paramount importance that you know you are doing so in a secure manner. In recent times the increase in attacks on internet users have risen exponentially in just the last few years. There are now entire organisations that have been set up to try and obtain your bank or other personal details and this has extended into hacking of trading accounts. In one case I know of a trader who lost around £40K because his account was hacked into.

Solution 4
1) Ensure you have up to date antivirus and antispyware and use a high quality firewall. I do not intend to make specific recommendations for which to use just that you should ensure that you do have them and that they are up to date..

2) Use a secure browser such as firefox. Some browsers are now providing the facility to show when a website is a forgery. It surprised me how often intelligent people have fallen for what are known as "Phishing Scams". This is where you may get an email saying that your details need updating or that your account in locked that appears to be from your bank or other institution similar to this.

When you open the email you get a message similar to that shown here

A good friend of mine who is also a policeman was caught with one of these because it looked so authentic. Of course the links in the message are for a fake website and the better browsers now show them to be fake such as this image for the above scam.

3) Use a quality broker. Some brokers are now offering a much higher level of security than even many banks are using. The better quality ones will now send you a secure digital device similar to this one

When you log into your account you also have to input a set of numbers that appear at the same time that are generated by the device. A hacker cannot access your account without this device being in their possession.

Issue 5 - Broker Reliability
There have been many cases I have heard of where traders were unable to close a trade because the platform used by the broker failed. Only last week there was a case of this with a well known spreadbetting company. When something like this happens then any phone lines are also likely to get jammed as a large number of customers will be trying to contact the broker at the same time. In some cases it has been days before many traders were able to close an open trade which could be very costly.

Solution 5
Open more than one trading account. In the event that you are unable to close an open trade, you can effectively "hedge" against your position by taking a trade of the same size in the opposite direction. This will limit your potential loss to a fixed amount.

For new traders this may all seem a lot to do and I would agree. For those who wish to become professional day-traders I would argue that the above is very important. Trading is a business just like any other and as such being correctly prepared is essential if you wish to avoid some of the pitfalls that all too often happen as discussed above.

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Re: Avoiding Potential Day-Trading Hazards

Really helpful article thank you

Dec 21, 2010

Member (5 posts)

i am in the process of setting up full-time and i found this article very useful indeed. while they are issues that a "common sense" approach should uncover, for someone new to the game, it is still very valuable to have them discussed by more experienced traders!..cheers

Jan 11, 2010

Member (118 posts)

Thanks for the article Paul.
Solution 5 would only work though if you had a lot of money sitting idle in an "unused account" for most of the time. I would rather that money was being worked in another fashion.
When creating the initial order, place the disaster stop order at the same time.

Jan 11, 2010

Member (246 posts)