Day Trading Money Management Day trading as a business
can be very profitable. It is probably the safest form of investing, as you are
focusing on a small number of positions, you are not holding any positions
overnight and you are able to enter and exit trades with pinpoint accuracy.
However, many day traders find themselves losing due to poor day
trading money management. How Much Should You Risk
The size of your trading
position is in direct proportion to the value of your portfolio. The key to day
trading success is to avoid big losers. I can not tell you how many times early
in my trading career, that I would be up huge over a 5-day period, only to have
a big loser wipe out 50% of my gains. So, to avoid this bad habit, you should
only risk a total of 1% of your portfolio on any one trade. Most traders take
this rule of thumb, and just put a 1% stop loss out there and when that is hit,
they just take the loss. If you have put on around 1,000 day trades or more,
you know all too well that a 1% loss can happen. So, in order to avoid taking
constant hits, you should allow yourself to take a 2% hit on your position,
where the dollar loss from this trade will only represent 1% of your overall
account value. Now that I have confused both of us, let me try to say that a
little easier. You simply want the total dollar amount invested per position,
to equate to 12.5% of your total margin able equity. So, if your account value
is Rs100, 000 you will have Rs400, 000 dollars in margin buying power, and
should use Rs50, 000 for each trade. Remember, this Rs50, 000 you use only
represents 12.5% of your margin able equity. This way if you take a 2% hit, it
will only be 1% of your total account value. Stops are not meant to be hit
It really upsets me when
I hear so called professionals advice new traders to set stop loss amounts.
Doesn't that seem like a general rule? Trading is a game of precision, and does
not operate in the realm of gray. Yes, you need a stop loss order for every
trade, but it is a fail safe. In this article we have discussed the power of a
2% stop rule and overall day trading money management.
But do you think you should let every losing trade hit your stop? Of course not
now I am not suggesting that we all become rogue traders and trade without
stops. The minute you see that the trade is wrong, get out with small
hit. Because in the end, the goal here is to see a small number of .25% or .5%
losses, while your winners are in the range of 1%-3%. This is how you will win
the game. Again, the 2% stop loss is for the unexpected sharp counter move, and
it is not your goal to have this stop hit. You should know well before your
stop is hit if you are in a bad trade. Operate in CashDay trading is a cash
business. The only loan you should be using is with your day trading margin
buying power. Do not start or continue to day trade, if you have to take out
loans, credit, or use part of your retirement to get in the game. Traders that
operate with a positive cash flow and utilize day trading money management
rules, have a much higher success rate and utilize day trading money management
rules, have a much higher success rate than traders that start out in the red.
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