4 Rules to Day Trading - Realistic Approach On How To Not Lose
Updated
Hello traders. So you are thinking of day trading as a career? Let's start off with the bad news: it's difficult. Good news? It's doable - if approached with the right mindset. This is a part of my risk management series that I believe many traders can benefit - new or advanced. Day trading involves buying an asset and reselling it for a profit the same day - or for swing traders, a few days. Many people turn to day trading because it’s rewarding when done correctly. But for the faint of heart, many fail to do so and give up - or lose their whole accounts. My job here is to explain to the general public that day trading is not realistic for the faint of heart; however, if you do your research, practice accordingly, day trading can lead to some serious gains.
1. Compare your expected returns
The first step in limiting your losses when day trading is figuring out the expected return on all the trades you’re considering. You can use the following formula to calculate the expected return as also shown above in the diagram
Once you have calculated the expected return on all of your upcoming trades, you can compare the results and choose the trades that offer the most opportunity for profit. Please refer to my previous post on how to calculate the risk reward ratio below this guide.
Manage Your Risk
Managing risk is incredibly important. The best way to limit your day trading losses is to manage individual trades. You should never risk more than 3-5% of your balance on one trade. People tend to go all in. Yes - it gives the maximum gains possible - but often leads to liquidations or a trap that you may never be able to get out! As an example, if you have $10,000 in your trading account, you never want to risk more than $300 on a single trade. By keeping this rule in mind, you know you’ll never lose everything if you happen to have a bad day in trading. More opportunities will come - I promise, especially if you keep this step in mind.
Create a Daily Stopping Point (Risk Reward Ratio (RRR))
Here, you must decide how much you can afford to risk each day. This is very straight forward, but often missed out by many traders, including me! You have a few ways to determine this stopping point. For example, you can plan for the day to stop a trade if you lose 3 percent of your account, or, if you have three losing trades in a row, or, if you lose the sum of your average daily profits. These are just three of my favorite strategies to use. Keep in mind that if you decide to create a stopping point based on your average profits, the amount you can afford to lose will increase over time as you improve your skills.
Use Stop-Loss Orders! (SUPER IMPORTANT)
This is probably one of the most important ones. Even if you don't follow any of the 4 steps above, you can still reduce your total blowout loss by having a stop loss in tact. With a stop-loss order, you can minimize losses by deciding on a specific price that doesn’t go below your tolerance for risk. If the price of your trade reaches the stop-loss, you know it’s time to exit. 99% of traders forget this.
I hope this post helps everyone out!
Please check out my whole risk management series below!
1. Compare your expected returns
The first step in limiting your losses when day trading is figuring out the expected return on all the trades you’re considering. You can use the following formula to calculate the expected return as also shown above in the diagram
Once you have calculated the expected return on all of your upcoming trades, you can compare the results and choose the trades that offer the most opportunity for profit. Please refer to my previous post on how to calculate the risk reward ratio below this guide.
Manage Your Risk
Managing risk is incredibly important. The best way to limit your day trading losses is to manage individual trades. You should never risk more than 3-5% of your balance on one trade. People tend to go all in. Yes - it gives the maximum gains possible - but often leads to liquidations or a trap that you may never be able to get out! As an example, if you have $10,000 in your trading account, you never want to risk more than $300 on a single trade. By keeping this rule in mind, you know you’ll never lose everything if you happen to have a bad day in trading. More opportunities will come - I promise, especially if you keep this step in mind.
Create a Daily Stopping Point (Risk Reward Ratio (RRR))
Here, you must decide how much you can afford to risk each day. This is very straight forward, but often missed out by many traders, including me! You have a few ways to determine this stopping point. For example, you can plan for the day to stop a trade if you lose 3 percent of your account, or, if you have three losing trades in a row, or, if you lose the sum of your average daily profits. These are just three of my favorite strategies to use. Keep in mind that if you decide to create a stopping point based on your average profits, the amount you can afford to lose will increase over time as you improve your skills.
Use Stop-Loss Orders! (SUPER IMPORTANT)
This is probably one of the most important ones. Even if you don't follow any of the 4 steps above, you can still reduce your total blowout loss by having a stop loss in tact. With a stop-loss order, you can minimize losses by deciding on a specific price that doesn’t go below your tolerance for risk. If the price of your trade reaches the stop-loss, you know it’s time to exit. 99% of traders forget this.
I hope this post helps everyone out!
Please check out my whole risk management series below!
Note
A Guide to Risk Reward Ratio (RRR) - How To Calculate and Setup
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