Day trading, the act of buying and selling stocks or other financial items within the same day and generating profit from small price changes, can be a profitable venture if done correctly.
However, it can also be a disastrous game if a few basic principles are not followed.
6 Tips for Day Trader Beginners
Tip 1: Set a Limit and Stick to It
You should decide up front how much capital you are willing to risk on each trade. Many successful day traders will risk 2% or less of their account for a given trade.
For example, if you have a $20,000 trading account and you are willing to risk 1% on each trade, your maximum loss per trade is 0.01 * 20,000, or $200 per trade.
Tip 2: Stay Calm and Trade
There is a rule about the stock market – it WILL test you. Your approach to day trading has to be one of cold calculations and strategy. You will need to keep emotions at bay, including such things as hope, fear, and, perhaps most importantly, greed.
You need to keep reminding yourself that decisions should be based on logic and experience, not emotion and reaction. In the end, it is a numbers game and the only important details are the total risk and reward.
Tip 3: Set a Trading Time
Day trading requires, as you might expect, your time during the day. If you have only limited hours during the day to commit, being a day trader might not be the best choice for you. A good day trader needs to track the market and spot opportunities as they arise, but this takes time.
Tip 4: Start Out Small
When you first start out day trading, limit yourself to only one or two stocks during a session. You can add stocks as you learn more about the fine art of tracking and spotting opportunities in the market.
Tip 5: Be Realistic About the Money
Believe it or not, a strategy doesn’t need to win all the time in order to be profitable. In fact, many traders will come up on the winning side only 60% or less. The important thing to make it a winning strategy is to make more on your wins than you lose on your losers.
You can do this by limiting the risk on each trade by a specific amount (tip 1 above ) and making sure that entry and exit methods are clearly defined.
Tip 6: Stick to the Plan
Many day traders have learned to move fast when an opportunity arises. But despite their speed, they are not moving blindly. The key is to build and refine a strategy for trading and stick to it.
Having a plan or a formula to fall back on when quick decisions are required is an important tool for the day trader to have at their disposal. While it may seem like you are moving according to gut and instinct, the fact is that you are just sticking to the plan.
Not everyone is cut out to be a day trader, but many have discovered that it is a great way to make money.
The important thing to remember is to develop a logical plan and stick to it. Otherwise, you could be only one bad trade away from problems.