Wondering how successful day traders beat the market consistently?
What are their secrets?Can you do it too?
Is it really possible to make money day trading?
If any of these questions are going through your mind, then voila!
You are at the right destination!
In this guide, we will explore the basics of day trading for beginners. You will get a deeper understanding of what day trading is, the popular day trading strategies, day trading philosophy, and the common pitfalls to avoid as a day trader.
You will come across a lot of trading tips and techniques in between. Take your time and understand them. This guide essentially takes lessons from my successes and mistakes over the past four years of trading.
The goal while creating this guide was to write a helpful post that imparts immense value to beginners. To write something that I wish I had come across when I started my day trading journey.
I hope you have a lot of takeaways from this guide. And that this guide takes you one step closer to day trading success.
What you will learn in this guide:
- What is day trading?
- What is the difference between day trading and investing?
- What are the prospects of successful day trading?
- Day Trading Philosophy
- Day Trading Strategies
- Trading Charts
- Fundamentals of Technical Analysis
- Fundamentals of Price Action Analysis
- 5 Big Mistakes to Avoid as a Day Trader
- Trading and Money Management
Without further ado, let’s get started!
What is Day Trading?
People often interchangeably use the words investing and trading. It’s a common misconception to think they are the same.
But it’s not. They are worlds apart for someone in finance. That’s why we should first understand what trading is before we get ahead to the nitty-gritty details.
So, what exactly is day trading?
Day trading is the act of buying and selling stocks (or any similar financial instruments like options, futures, commodities, cryptocurrencies, etc.) within the time frame of a single day.
To be more precise, a day trader will not hold any positions overnight. He/she closes the entire position before the market closes. Anyone who holds their position overnight is not a day trader.
Another way to phrase the definition is that a day trader is someone who profits from quick changes in the price within a day’s time. The trade duration for a day-trader could be from a few seconds to a maximum of one day (or the market open hours)
What is the Difference Between Trading and Investing?
Now that you know what trading is, let us try to understand what investing is. And see how trading and investing are different.
Investing is the act of buying and selling stocks (or other financial instruments) with the goal of making a positive return over a period of time. Usually, this period of time extends to several months or years.
In short, investing is a long-term act and trading is a short-term act.
Please note that there is no hard and fast rule that says investing is a long-term act and trading is a short-term act. In fact, trading is also a form of investing. Generally, the words are so used to indicate a long-term (investing) and short-term (trading) approach.
A day trader would buy and sell a stock in one day whereas an investor would buy a stock, keep it for years, and sell.
Confused as to why investors stay in the market for years when they could make a trade within minutes and try to make a profit?
The answer is, investing is less stressful and investors tend to generate better returns than traders.
The power of compounding makes investing a powerful strategy.
But do not undervalue the power of day trading. Trading if done correctly could generate several times the returns from investing.
What are the Prospects of Successful Day Trading?
Let’s see some quick numbers to prove this point. The following calculations will surprise you for sure!
Let’s say you have 100 dollars. You trade 7 days a week and manage to generate 1% profit every day.
Do you know what will happen in a year? in 3 years? and 6 years?
Your $100 will become $1300 in one year.
Your $100 will become $240,000 in 3 years.
Want to know how much it becomes in 6 years?
It’s 579 million dollars!
And in 7 years?
7.8 billion dollars!
Amazing right!
Well, please do not expect to be a millionaire reading this guide.
These are some theoretical numbers to give you a sense of the prospects of trading.
If it was actually that easy to generate 1% return consistently every day for many years, then almost everyone on the planet would be millionaires and billionaires right!
This must also tell you how hard it is to succeed as a day trader. It seems so simple on paper, but very few people actually ever achieve it.
Day trading is hard.
It’s worth it if you can crack the code, but it’s hard.
If you are a very beginner entering the world of finance and stock markets, our recommendation would be to focus on long-term investing. It’s how the majority of investors build their wealth.
But if you like that feeling of adrenaline pumping and making split-second decisions, then, day trading is for you. You will go from “Oh wow! so much money in 5 minutes!” to “What! Did I lose my investment in 10 minutes!” on a daily basis.
It’s a roller coaster ride, to be frank.
Let’s move ahead.
Day Trading Philosophy
Let me let you in on a secret. It might sound silly at the beginning, but as you move ahead in your trading journey, you will understand it better.
Your trading system and trading strategy only make up to 50% of your task. The other half is trading philosophy. It’s as important as your trading system. Maybe even more important!
What is trading philosophy?
Trading philosophy is your set of beliefs and processes that guides how you trade. Having a solid philosophy is crucial to success in day trading.
For example, suppose your system says it’s okay to lose up to 1% of your entire account in a single trade. Then, that should be a clear rule. The moment you reach the 1% mark, you should get out of the market.
Your emotions might dictate otherwise. You will wonder if the market will come back up if you could wait for some more time or extend your stop loss up to 2%.
The true success of a trader is not giving in to these emotions. That’s an example of a solid trading philosophy. No matter what happens, I will stick to what my system says is a solid philosophy.
That is what most successful traders do as well. Please note that every trader loses money. No trader is always profitable. The trick lies in making sure that you lose small but win big.
Lose Small, Win Big
This is one of the biggest pieces of trading advice I could give.
Lose small, win big!
This is the approach followed by successful traders for decades. To make it simple, get out as fast as you can when things are not going your way and stay as long as possible when things are going your way.
Or in other words, consider the stop loss as your bread and butter!
What is a stop-loss?
Wondering what a stop loss is?
It’s the price value that you preset to get out of the market when things do not go your way.
For example, let’s say you want to day trade bitcoin. Let’s assume that the price of bitcoin now is $40,000. Your technical analysis says that there could be a sharp price increase in the next hour, and the price could reach up to $50,000.
What would a normal person do?
Buy bitcoin now and wait and see what happens right. If it goes up, hurray, you get a profit. If it goes down, well, you will get out if that happens.
You’re terribly mistaken if that’s what you thought.
A real trader first think of how to avoid losing money, not how much they could make. The first thing you have to do in this case is to identify the price at which you would get out of the market if things go wrong.
Let’s assume your system says that the chances of price falling below $37,000 are very less. What you have to do first is to set a stop loss at $37,000 while making the trade. This way, you will never have to worry about losing big.
Why Stop Loss?
Stop loss is crucial to your trading success. You must set a stop loss every single time you trade.
Why should you do that?
The following points will explain the reason.
Reason 1: Your Emotions Will Get to You
If you do not set a stop loss, your emotions will get to you. In our previous example, let’s assume the markets didn’t go your way and the price went to $37K.
You would now be taking a $3K hit. Your mind will now tell you that, “Hey, $37K’s the worst we expected. It can’t fall more right. It might go till $36K or so at worst and will surely come back up. Let’s give some more breathing space and the price will come back up”.
This is mostly what you would be thinking. The price may come up or it may go down further. We will never know that.
You will have the same thought at $36K. You will be like “Wow, I never expected price to fall this low. $37K was the plan, now it’s $36K. I see a support at $35K. There is no way the price will go below that or even till that. Let’s wait for some more time.”
This will keep on happening and what eventually happens is you would have lost a big amount by the end of the trade.
Remember the number one rule for success in trading?
It’s to lose small and win big.
If you are losing big and winning big, well then, you are just a breakeven trader. All you can do is just look at graphs and never make any profit.
Now, let’s assume you have a stop loss set at the time you entered the trade. And you make it a primary rule in your trading system that you will exit once the stop loss is hit no matter what.
That way, the maximum you would lose from this trade is $3K.
And what if the trade went your way? From $40K to $50K?
$10K profit. That’s nice right. $3K is the maximum loss and $10K is the potential profit.
That way, even if you lose 3 times, you will become profitable the one time you win. A good trader always wins more often than he loses. And that’s how traders make money.
These values are known as Risk: Reward Ratios and Win Rate.
We will see them in detail a bit later. Let’s see the second reason as well before that.
Reason 2: Unexpected Technical Issues
Assume the price is at $37K. You didn’t let your emotions get to you and have decided to exit now.
Bam, the power went off!
or you lost internet connectivity!
or your device stopped working!
There are a thousand reasons why you might not be able to exit at that moment.
A few other interesting but very common reasons are:
- You started watching a movie or doing something after making the trade and forgot completely about it. You would later come back to see that the price is now at $30K.
- You were tracking the price sharply till it reached $39K. And a guest suddenly walked into your house. You will now have to go talk to them. You totally forgot about your trade while they were with you. Once they are gone, you might come back to your device to find that there was a sharp fall in price and it went as low as $25K!
These might sound funny. But they are very common reasons many people lose money. It could happen to you, me, or anyone!
It’s okay if you do not set an upper cap and you returned to see the bitcoin price up at $60K. But you never want to see a big loss.
Always, Always Set a Stop Loss.
Now that we have discussed why stop loss is mandatory while trading, let’s go back to the concepts of Risk-Reward ratios and Win rates.
What are Risk-Reward Ratios and Win Rates?
In our earlier example, we have seen the win to lose odds right. We lose $3K if things go negative and get $10K if things go positive. For ease of calculation, let’s assume a profit of $9K.
The win to lose ratio here is 3K:9K or in short 1:3. That’s called the risk-reward ratio. It is the ratio of the risk we take to the reward we get.
When the risk: reward ratio is 1:3, it means that 1 win is equal to 3 losses. In other words, you will still break even if you win only 1 out of 4 (25%) trades.
What if the risk-reward was 1:2?
It means that 1 win is equal to 2 losses. Or that, you will break even if you win 1/3 (33.33%) times.
Assuming the risk: reward ratio is clear, let’s see what win rates mean.
In the example of 1:3 risk-reward, we said that you need to win only 25% of the time to break even right. That percentage value is known as the win rate.
Win rate is the percentage of times you win. If you win 1 out of every 2 trades, you have a 1/2= 50% win rate. If you win 3 out of every 4 trades, you have a 3/4= 75% win rate. And if you win 1 out of every 5 trades, you have a 1/5= 20% win rate.
Hope you understand the concepts of both risk: reward ratio as well as win rates.
Let’s see two highly important points now.
- Good day traders win more often than they lose.
- Good day traders win big and lose small.
Now combine these two and you have the holy grail of trading.
A win rate above 50% and a risk: reward better than 1:1 means that you are a successful trader.
So, what should you aim for?
A risk: reward ratio of 1:2 or 1:3 and a win rate of 66% (win 2/3 trades) or higher is what you should be aiming for.
Please note that this is not a mandatory rule. In fact, the beauty of trading is in the fact that you could drastically vary these ratios and still be profitable.
For example, suppose you lose 9 out of 10 times (Win rate=10%). But on the 10th time you win, if you win so big as to cover all your previous losses (Risk: Reward>1:10), you will still be a profitable trader.
That’s the beauty of trading!
In short, win more often than you lose, win big, and lose small when you do.
Keep the above bolded words close to your heart and you will find your way to being a successful day trader.
Day Trading Strategies For Beginners
Now that we have understood what day trading is let us look at some of the most popular day trading strategies.
Before we go deep into them, you should first understand what technical analysis, fundamental analysis, and price action are and the difference between them.
Fundamental Analysis:
It is the method of analyzing the value of financial instruments using financial statements, macro-economic, and industry trends. It is most usually used for long-term investments.
By understanding how an industry or the overall economy is doing, we will decide whether to go long or short.
What does going long and short mean?
Going long means we have a positive outlook. If we believe the prices are going to increase, we will buy the asset now and sell it later. It’s called going long.
Going short means we have a negative outlook. If prices are to go down, we would sell the assets now at a higher price and buy them back when prices are lower. It’s called as going short.
The above definition of short might seem counterintuitive. You should be wondering how one can sell first and buy later. Shouldn’t you first have something with you to sell?
It’s something special about stock markets. You have the ability to sell without holding any stocks (or other financial instruments). It’s like you have nothing on your hand, but still you sold something. It’s called as short selling.
Please note that there is a risk associated with short selling. In fact, there is infinite risk associated with short selling.
If you buy something and its price reduces to zero, you would have lost your investment which is the price you paid to buy it. Your maximum risk is limited here. Whatever you invested is your maximum loss because the price cannot go below zero.
But if you short sell, your risks are infinite. When you short sell, you expect the market to go down. You plan to buy back later at a lower price.
The risk occurs when the price goes up. You have now sold something, and its price is going up. You will have to buy it back at a higher price. It’s the reverse of buying something for 100 dollars and selling at 90 dollars. That’s not a good trade, right!
The dangerous part is that the upper price is not limited. The price could go as high as it wants to.
Let’s say an instrument right now is at $90. If you go long (or buy that stock first and sell it later), your maximum risk is 90 dollars. That’s what you paid to buy the instrument. And the worst occurs if the instrument you bought becomes worthless tomorrow.
But if you go short (sell now and buy later), you have unlimited risk. If that instrument becomes really valuable, its price tomorrowcouldbe 200, 500, or even a thousand dollars. However much increased, you are now at a loss of that increase.
Hope you understand what going long and short means and the risk associated with them (especially with going short).
Let us now see what technical analysis is.
Technical Analysis:
It is the method of analysis done using statistical data like price, volume, etc. It is mostly employed for forecasting short-term changes in price.
We also use tools called as technical indicators to assist us with technical analysis. These are mathematical tools that will help us understand the price movement better. Few examples are moving averages, Bollinger bands, Moving Average Convergence Divergence, etc.
Please do not get afraid after reading these technical terms. They are very simple and intuitive concepts that anybody could pick up.
Price Action:
Price action refers to the method of using chart patterns and trends to forecast future price movements. Over the years, we were able to identify certain chart patterns that tend to appear repeatedly.
Once we know those patterns in detail and what follows when such a pattern occurs, we will be able to act accordingly when that pattern comes up again in the future.
Making use of such patterns and trends is known as price action.
As a day trader, you would depend on technical analysis and price action to make the buy/sell decisions.
You would have seen traders looking at those fancy charts and buying stocks on movies right. That is exactly what you would be doing. In short, as a day trader, price charts become your bread and butter.
There are different technical analysis strategies and chart patterns available. We will see the basic strategies and concepts you must know in this guide.
Trading Charts
While trying to understand technical analysis, the first thing you should learn about is trading charts and graphs. There are numerous chart types available to trade.
The most popular chart model used by the traders is the Japanese Candlestick Model. As the name suggests, it was developed in Japan during the 1800s. It became popular in the west during the late 20th century.
But once people understood the power of candlestick charts, it became the default chart type used by most traders.
Here is an example of how a candlestick chart looks like.
The other popular types of charts are bar charts, line charts, Heikin Ashi chart, point and figure chart, etc. Below is an example of a line chart.
Fundamentals of Technical Analysis
Now that we have seen what candlestick charts are, let’s look more into technical indicators. As mentioned before, indicators are tools that will help you understand the price movement better.
There are four major types of indicators:
- Trend Indicators
- Volume Indicators
- Momentum Indicators
- Volatility Indicators
Let’s see what they are.
Trend Indicators:
These are indicators that show you the direction of the trend.
But, what is a trend?
A trend is the general direction of the market or the price of a financial instrument.
If the market has a positive outlook and is moving up, we call it an “uptrend“. On the other hand, if the market is going down, we call it a “downtrend“.
Trend indicators are tools that help us identify the trend, that is, to help find whether the market is in an uptrend or a downtrend.
The common trading strategy is to trade with the trend. It’s the golden strategy for trend traders.
“Always trade with the trend”
This means that when the market is in an uptrend, you have to buy the asset and when the market is in a downtrend, you have to sell the asset.
You should understand the concept of trends are in detail if you wish to be a successful trader. We will limit our discussion on trends in this guide now, but we will see in detail what trends are and more about trend trading in a separate guide.
The popular trend indicators are:
- Simple Moving Average (SMA)
- Exponential Moving Average (EMA)
- Moving Average Convergence Divergence (MACD)
- Supertrend
- Parabolic SAR Indicator
A good trader should know what these indicators are and how they work. We will see each of them in detail in later posts.
Volume Indicators:
These are indicators or tools that make use of the volume data to provide information on the market direction.
The general concept is that a high volume is representative of a sharp upcoming price movement and a low volume is representative of a ranging market.
What is a range?
A market is said to be ranging when the price value oscillates between a certain high and low values and doesn’t make a move in any specific direction.
In a trend, we know the market will either keep going up (uptrend) or it will keep going down (downtrend). But in the ranging market, the price will not move in any particular direction and will stay within a range of high and low values.
You can see how a ranging market would look like in the below image.
What are Support and Resistance?
Wondering what the support and resistance in the above image mean?
They are two of the most popular concepts in technical analysis. Support and resistance are certain predetermined value of the asset’s price at which the price will tend to stop and reverse.
If you see on the above image, the price will reverse and start going down at the resistance (high of range). Similarly, it again reverses and moves up at the support (low of the range).
Please note that support and resistance aren’t limited to ranging markets alone. They occur similarly on trending markets as well. Let’s see some visual examples.
As you can see from the above examples, the price reverses and start going UP at the SUPPORT. And the price reverses and starts going DOWN at the RESISTANCE.
Coming back to our initial discussion of volume indicators, a low volume is indicative of a ranging market, and a high volume is indicative of a trending market.
A high volume could result in either an uptrend or a downtrend. We cannot make that decision from volume indicators alone. But, that’s where the trend indicators come in handy.
When the volume indicator shows high trading volumes, look at the trend indicator to see whether the market is going up or down. By combining a volume and trend indicator, you will get a general idea of where the market is headed to.
A few of the popular volume indicators are:
- Volume Profile
- Chaikin Money Flow (CMF)
- On Balance Volume (OBV)
Momentum Indicators:
The third type of indicator is the momentum indicator.
Using the volume and trend indicator, we now have a general direction of the market movement.
The question that now pops up is how strong this trend or movement is going to be?
Momentum indicators help answer this question. They tell us about the market momentum, that is, the strength of the underlying market trend.
Like the support and resistance concepts for a trend, momentum indicators typically use the boundaries called “Overbought” and “Oversold” levels.
Overbought levels indicate that the financial instrument is overbought. That is, it is trading at a price greater than its intrinsic value. It is an indication that a downward reversal of price is imminent.
Similarly, oversold levels indicate that the asset is oversold and that an upward reversal of price is highly likely.
They show when a trend is running out of momentum. When the prices start reversing from the overbought or oversold levels, it is an indication that the trend has lost its momentum, and a reversal is very likely.
Few popular momentum indicators include:
- Relative Strength Index (RSI)
- Stochastic Indicator
- Commodity Channel Index (CCI)
Volatility Indicators:
Volatility refers to the degree of variation in the price of an asset. A stock is said to be highly volatile when its price is changing rapidly.
You can use volatility indicators to identify the volatility of an instrument. High volatility refers to sharp changes in prices and low volatility refers to a quiet market with very little price movement.
The opportunity for profit, as well as risk, are high with volatile stocks. Low volatility is an indication of a ranging market.
Some of the popular volatility indicators are:
- Average True Range (ATR)
- Average Directional Movement Index (ADX)
Apart from classifying the technical indicators as trend, volume, momentum, and volatility-based, we can also define them on the basis of their indication capabilities as:
- Lagging Indicators
- Leading Indicators
Lagging Indicators:
A lagging indicator takes in the past data and gives an indication of why the current price is where it is.
As the name suggests, they lag the data. By using a lagging indicator, you will identify a trend only after it has actually started.
A few examples of lagging indicators are Moving Averages, RSI, MACD, etc.
Leading Indicators:
Leading indicators on the other hand use past data and try to forecast the future price. The advantage is that you will be able to get in on a trend at its beginning since there is no lag in data.
The disadvantage is that leading indicators will never always be correct. Markets are truly random and it is not possible to predict them accurately. Thus, there is a good chance that the signal from a leading indicator could go wrong as well.
Popular leading indicators are Fibonacci Retracement, Donchian Channels, Support and Resistance, etc.
Hope you now have a basic understanding of technical analysis concepts such as candlestick charts, indicators, trends, support and resistance, etc.
Fundamentals of Price Action Trading
We will now have a brief look at the second trading strategy, the price action.
As we have seen, price action makes use of repeating patterns in the chart to predict the market movement.
Some important concepts to know before looking at chart patterns are:
- Trends
- Support and Resistance
- Candlesticks
- Breakouts
We have already looked at what the first three concepts are about. Let us now see what breakout trading means before we learn more about price action patterns.
Breakouts:
Breakouts occur when the support or resistance fails to hold the price. It is expected that the price would reverse at the support/resistance level. But at times, price will cross this level with increased volume. Such movements are called as breakouts.
When a breakout occurs, the price value does not retest the previous high or low again. You can see an example of a positive breakout in the above image.
You will notice that once the price broke the resistance, it never came back to the resistance level. It continued going in the direction of the trend.
Please note that a breakout would be mostly supported by high trading volumes. When a financial instrument in a trading range starts showing a sudden build-up in volume, it is a likely indication that a breakout could occur.
The breakouts could occur in any direction, upward or downward, depending on the direction of the trend.
Let us now have a quick look at a few of the most popular price action patterns. If you wish to be a successful day trader, you should learn about as many price action patterns and indicators as possible.
The following is a brief list to give you an overview of a few of the most popular chart patterns.
Head and Shoulders Pattern:
It is a reversal pattern that consists of a head and two shoulders. The pattern is often followed by a reversal in price.
Double Top/Bottom Pattern:
It is another reversal pattern that consists of two tops or bottoms. The pattern shows the inability of a price to break the support/resistance and a reversal following this.
Rectangle Pattern:
It is a continuation pattern that indicates that the price will continue to move in the same direction as before.
The rectangle indicates a range. When the price enters a range followed by a movement in a certain direction, it is likely to continue its movement in the direction of the trend.
We hope you now understand what price action analysis means. And alsohave a basic understanding of what trading is, important trading terminologies, and the most popular trading strategies.
Let us now take a look at five common mistakes made by beginner traders.
5 Big Mistakes to Avoid as a Day Trader
Below are a few of the common mistakes to avoid as a day trader.
1. Indicator Stuffing
During my first year of trading, I used to stack indicators one over the other. I never really tried to understand indicators. Rather, I was just mixing them and checking if I have discovered the perfect combination.
There are multiple types of indicators like momentum indicators, volume indicators, trend indicators, etc. Under each of these categories, we have numerous indicators.
Since most indicators have a different default value, it might look different in the chart. But if you take a standard value and analyze them, you will realize that they all give pretty much the same information.
You should learn about as many indicators and chart patterns as possible. But do not cramp everything into your chart. A good trader adds a maximum of one each of trend, momentum, volume, and volatility indicators in his chart. Anything more is too much.
In fact, 1 of each type in itself is generally thought of as too many indicators. Most people usually use 2 to 3 indicators, that complement each other.
Thus, if you are using multiple momentum indicators or trend indicators, that means you haven’t understood indicators correctly. For example, moving averages alone can act as a trend indicator. If you have added MA to your chart, you basically do not need any other trend indicators.
Adding more than one indicator that falls to the same category (trend, momentum, volume, volatility) is a common mistake most traders make at the beginning. Make sure not to cramp many indicators on your chart.
2. Not setting a Stop Loss
“Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep. I know where I’m getting out before I get in. The position size on a trade is determined by the stop, and the stop is determined on a technical basis.” –Bruce Kovner
This is one of the biggest mistakes you could make in trading. Always, always set a stop loss.
Like we said earlier, without stop loss, you could fall prey to your emotions or could get affected by technical or personal issues. The best way to avoid this is to cultivate the habit of putting a stop loss to every single trade you make from day one.
3. Over Trading/ Revenge Trading
Let’s assume that your most recent trade resulted in a loss. And it was a somewhat heavy loss too. What would you do?
If you said continue trading even harder to make back what you lost and more, you are wrong. That’s called overtrading.
When you make a big loss, stop trading for some time. Take some time to think about the severity of the loss. If you think the loss was too big, the best idea would be not to continue trading that day.
Because you would most likely fall prey to your emotions trying to make back what you lost. It would be better to start all over again the next day.
Never over trade. When you feel you are not in control, step back and stop trading. That will only do you good.
4. Margin Trading
Your broker may allow you to trade with margins. Margin trading here means that you would be allowed to trade for a much greater amount than what you have with you.
For example, some brokers allow a margin of 10. That means, even though you only have $100 with you, your broker will let you trade for 10 times that value, that is, $1000.
Sounds cool right?
Well, it’s the riskiest thing you could do. The chances are that you will wipe out your entire account in a few trades with margin.
There are brokers that allow even 100 times margin. Think of a 100 times margin!
If you made a trade and the asset falls by 1%, that means, you have lost 100% or that your account has become zero. Obviously, it would also mean that if the price increased by 1%, you could double your account in a single trade.
But the margin is a really risky concept. Especially when you are starting out…
5. Using Entire Account for Every Trade
It is a very foolish idea to use your entire account on every trade. Always make sure that you only use a smaller part of your account on each trade. You can set a rule for yourself such as using only 5% of your entire account per trade.
Moreover, set a fixed stop loss for every trade. For example, you could set a rule in your trading system that the maximum loss you will allow per trade is 2% of your entire account.
If you follow such rules, you will be able to last much longer and keep your money safe.
Also, make sure that you win really big when you are winning.
Trading and Money Management
The most important skill you must acquire to be a successful day trader is money management skills. You should make sure that you do not lose big, do not overtrade, and do not put all your money in a single trade.
Rightly managing money is a crucial skill every day trader should adopt.
Once you learn how to stop losing money, you will gradually start making profits. Most traders never start out profitably.
It’s a long and strenuous path from being a loss-making trader to breakeven and then to profitability. It takes patience, money management skills, and continuous learning and adapting to succeed as a day trader.
I hope you now have a basic understanding of day trading and related concepts. Please note that what we have covered in this guide is just the tip of the iceberg.
Becoming a day trader requires a lot of learning and knowledge. You will definitely acquire them over the years, but it will take time. And the only way to learn is to practice and start trading.
And when you start trading, keep the points we have discussed in this guide in mind.
Summary:
Let us reiterate a few of the most important points before we conclude.
- Lose small, win big
- Trading philosophy is as important as your trading system. Your mind matters equally as your brains.
- Always, always keep a stop loss (for every single order)
- Make sure that your system has a rewarding win rate and risk:reward ratio.
- Do not limit yourself to be a technical analysis only or price action only trader. Learn both and employ whichever method feels best to you. The more you learn, the better you trade.
- Do not stuff too many indicators into your charts. Use two or three that complement each other well (ie, from different categories like trend, momentum, volume, and volatility)
- Do not over trade or revenge trade. When you make a big loss, step aside and make your mind calm. Try to resume trading later in the day or the next day.
- Do not use too much margin while trading. The more the margin, the greater the risk and the greater the potential damages.
- Never use your entire account for trading. Set a maximum limit for your per trade amount and accepted loss per trade.
