3 Tips for Every New Day Trader Must Know
Day trading is simply a form of exposure to the financial markets in which the trader buys and sells equities, forex, options, or other financial assets within the same day. Day trading is fundamentally different from other types of trading and it is also significantly different from the buy, hold, and sell type of trading or investing.
Many people are embracing day trading because it has consistently proven to be a lucrative way to make money at home without the drudgery of a 9 to 5. Many unemployed, underemployed, and people who want a side hustle are paying serious attention to the opportunities that day trading provides.
Unfortunately, new traders tend to lose their trading capital on the financial market – the 90/90/90 trading rule states that 90% of new traders will lose 90% of their money within the first 90 days. This piece provides insights that can help you increase your odds of trading success.
- Successful trading requires more than charts and graphs
A decent understanding of technical analysis and fundamental analysis will help you make smarter trading decisions. In fact, a trader who understands technical analysis is likely to be better off than a trader who doesn’t know how to spot market patterns and trends. Yet, an understanding of technical and fundamental analysis alone won’t be enough to guarantee your trading success.
You need to understand your emotions and become an expert at managing and controlling such emotions because trading is as every bit as psychological as it is numerical. You can have the best trading platform, follow the markets on multiple screens, and still lose money if you allow your emotions to determine your trading actions and reactions.
Playing the markets as a day trader is not a get rich scheme; you’ll alternate between cycles of making money and losing money. Being in charge of your emotions will help you learn from your losing trades in order to avoid a repetition of the mistakes. Eventually, you’ll start to have more profitable trades and fewer losing trades.
- Master the art of timing
Many people erroneously believe that successful day traders usually spend the whole day glued to the front of a computer with multiple monitors while a TV permanently set to CNBC drones away on the side. On the contrary, successful day traders tend to place fewer trades in a single trading session and they certainly do not trade the markets every day. If you want to succeed as a day trader, you’ll need to be able to preempt market trending days and the types of assets that are likely to trend along with the market.
More importantly, you need to understand the timing of the markets so that your trades get to benefit from volatility tailwinds instead of combating volatility headwinds. For instance, many new traders tend to avoid making market moves in the first and last 20 minutes of a trading session, but the rush hour could offer opportunities if you make educated decisions.
- Don’t forget to manage trading risks
Many new traders are carried away with the glamour that is attached to being called a day trader. However, in reality, if you have a decent trading capital and you want to maximize the odds of increasing your profits, you’ll actually be doing the work of a risk manager. You need to identify high probability trades and take positions accordingly – you also need to identity low probability trades and ignore them.
Managing trading risks will also require you to use stop/limit loss orders. You can’t afford to fall into the trap of thinking that you are invincible. You must create moats around your trades so that your downside on every trade is protected. More importantly, you need to develop a strategy that allows your winning trades to run their full course while you cut losing trades short as fast as possible.