How to Minimize Day Trading Risks
Whether you are a bull or a bear, there is nothing like the rush of day trading. Even gambling in Vegas pales in comparison to the thrill of taking down a trade for some serious cash. But when 4 p.m. hits on the East coast, you are done for the day. Then tomorrow you will wage war all over again. Here are some tips on how to minimize those day trading risks.
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Instructions
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Set aside capital with which to day trade. There is a reason that Warren Buffet is the most successful investor in American History--because he employs a buy-and-hold strategy. However, day trading capital should not be your retirement; it should not be your mortgage money. It should be a separate set of capital, almost like "fun money," that you can play with.
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Buy your stock or ETFs in pieces. When you are day trading, you are trying to move large amounts of capital into a position and then liquidating that position as soon as it moves in your favor. However, by buying the position at multiple times throughout the day you will target your cost basis and get the best price. For instance, if a stock opens at $10 and you buy 1,000 shares you now own $10,000 of that company. If during trading it goes to $9, you are suddenly down $1,000. However, if you buy 500 shares at $10, then wait, and buy 500 shares at $9, then you are locked in at a better price of $9.50. If the stock goes to $10.50 after you buy at $10, then you are ahead of the game.
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Set stop losses. This is when a stock hits a price or percentage lower than where you bought and you automatically sell. This is imperative and should be set at 3 to 4 percent. The whole point of day trading is that, by the end of the day, you are completely out of the market. So if you bet wrong on a stock and it suddenly plummets 10 percent and you ride it all the way down, you have maximized your pain, because that stock will not come back on that day. However, if you sell the stock only down 4 percent, then you avoid the additional 6 percent and have a shot to buy it at a lower price for a late day bounce back of 2 or 3 percent.
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Avoid buying on margin. When the market is roaring, it is so tempting to buy as much stock as the brokerage will let you own. You feel like you're making money hand over fist. But the moment the tape turns against you, you suddenly feel as if you are losing your shirt. Because most brokerages will let you buy twice as much stock as you have money, you can quite quickly find yourself behind the eight ball when the bad luck hits. If your account value drops below 30 percent, you will get something called a margin call, which will demand you deposit more money, or they will sell those positions under you at a huge loss.
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Look for companies with stories in the news. Every single day there are "story" stocks. These are stocks that are on the move, positive or negative, because of some development in their business. As a day trader, you are looking for such opportunity. Because if the stock trades within a 5 percent range on the day, you are looking to exploit that spread and make 2 percent on your $50,000 or $100,000. Once the news breaks, you will be able to determine which way the stock is heading. Then you can bet for or against it depending on the story, and have a chance at making money.
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Get out of the market. Remember, people lock away their money all year in a CD just to gain a few percentage points. So if you are suddenly up 1 percentage point on a day, you are doing well. Take your gain, and go play golf. Conversely, if the tape fights against you, take your losses and come back tomorrow. There will always be another day. You will have winning days and you will have losing days. If you average making money 6 days out of 10, you are doing really well.
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Become intimate with your stocks. The best day traders minimize their risks because they follow their stocks for years. They know the ups, the downs, and the pattern with which it trades. By learning these patterns, you'll know when to get in or out.
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Tips & Warnings
People who get addicted to day trading are similar to gamblers. Watch the signs for people who can't stop trading the stock market.
