If you have just started day trading or are just thinking about trying to day trade here are some pointers for you.
- Understanding the stock markets and their movements.
- Having adequate risk capital
- Have a trading plan and stick to it
- You need patience and discipline
- Save your profits
- Cut your losses
If you do not have or cannot do the afore mentioned things I can guarantee you will lose money in the markets day trading, let me explain.
First and foremost, understanding what causes stocks and the markets movement is very important.
- News affects the markets movements and not just news in the U.S. news from around the world affects our markets.
- First identify whether the market is in an uptrend or a downtrend, the trend will usually affect the price of the stock that you are going to trade.
- Also be aware that there is a seasonal cycle in the markets. November and December usually rise because that is when manufacturing, transportation and hiring pick up for the Christmas season.
- Mid January thru mid March the markets usually pull back, Why? manufacturing slows down after the Christmas sales rush.
- Mid March thru April the market picks up slightly. May is usually a bad month, there is a saying “Sell in May and go away.”
- June and July usually do well because the market rallies when dividends are paid out in July.
- August thru October the market normally falls slightly as sales and economic news for the first half of the year is digested. Our economic climate really dictates the market movements.
You also need to have adequate risk capital.
- What is risk capital, you ask? I’ll tell you, it is money that is solely dedicated to your day trading endeavor.
- You will not need it next month or the next six months to pay your bills or add to your retirement account.
- To day trade you will need to have a margin account, Broker/Dealers registered with NASD/NYSE require a $25,000 minimum balance on any day that day trading occurs.
- A margin account gives you the ability to trade 4 times your $25,000, so $200,000 worth of buying power. I would personally never do this, it’s a good way to lose a lot of money if the trade goes against you.
- If and when I use margin it is for a very short period of time, on a trade that I’m very sure will trade my way and never would I suggest holding a trade overnight if you have used margin.
Have a trading plan and stick to it.
- Before you ever make a trade talk to people that day trade. Learn what criteria they use when deciding on a stock to trade.
- Get some ideas on when they would close a losing trade, a wining trade and then develop your own plan and stick with it.
- It’s really easy to get greedy when your making money. Set realistic profit goals and loss limits and stick to it.
Traders need to have patience and discipline
- If you have your plan in place have the discipline to accept small inevitable losses when they come and take your pre-determined profits.
- It is difficult to trade and be successful without proper discipline. Patience is needed to be able to sit for hours at a time waiting for proper entry and exit points.
Save your profits whenever possible.
- I suggest only using your original capital to trade with, when you have a profit leave it in your account.
- Think of your day trading like a business and run it as such.
Cut your losses
- Do not let a loser run in hopes that it will rise again, fear is a deadly emotion when it comes to trading, take a small loss before it becomes a large one.
- Capital preservation is the name of the game, your capital is the foundation of your trading business.
- There will always be another day and another stock to trade to make up the loss.
If you can follow these pointers you will make money, if not they are six guaranteed ways you will lose money day trading.
As always, no matter how you trade long or short, may all of your trades be profitable!
