How to Avoid Day Trading Risks
Day trading is so inherently risky that it's impossible to avoid all day trading risks. There are, however, ways that you can minimize your exposure to equity loss.
Other People Are Reading
Things You'll Need
- Fastest Internet connection you can afford
- Equity balance in margin account of $25,000
- Active trader software
Instructions
-
Protect Your Trades
-
1
Set up stop orders on your trading accounts. This tells your electronic trading account to buy or sell a stock if it rises above or drops below a certain price. This allows you to only "lose a little" when you have sold short or can't be in front of your computer every second of the day.
-
2
Sell your day trades before the end of the business day. This allows you to avoid a big change in price, which can sometimes occur between the end of one business day and the beginning of the next.
-
-
3
Avoid trading on hot tips unless you honestly feel that you are the only person who has knowledge of them. Otherwise, the market has probably already factored the rumor into the price of the stock. Be aware that if you get a tip from an employee of the company whose stock you then trade, you may be guilty of insider trading and subject to harsh penalties--even jail time.
Know the Market to Avoid Day Trading Risks
-
4
Stay on top of breaking news. Even if you are not "news playing," or trading on the hoped-for market impact of various breaking news items, it behooves you to keep on top of what's happening in the market and in the world. For instance, if Congress announces that the country is going to war, then many traders would quickly move into munitions stocks.
-
5
Visit chat rooms. Other traders can be remarkably unselfish with ideas and theories about where the market is going and why. Any third-person point of view, even if you don't agree with it, can be helpful in determining how your competition is thinking.
-
6
Stay humble. Remember that there are risks you can't ever know about: secret merger negotiations, impending and unexpected bankruptcies and other corporate dilemmas. No one trader can ever eliminate all the risks of day trading.
-
1
Tips & Warnings
Never day trade with more than you can afford to lose. Most day traders lose money on the market, regardless of trading experience or their access to "hot tips."
