Top 10 Tips for Profitable Day Trading
Most people interested in learning how to be profitable traders will only spend a few minutes online before reading phrases like “plan your trade; trade your plan” and “keep your losses to a minimum.”
For new and beginner day traders, these tidbits of information will seem more like a distraction than sound advice. Oftentimes, new day traders simply want to know how to set up their charts so they can make money as quickly as possible and be profitable doing so.
To be successful in day trading, you definitely need to understand the importance of adhering to a guideline that has helped all types of traders, with a variety of trading account size. Each tip alone is important, but when they work together the effects should produce profitable results.
Beginners’ trading tips with an integrated guideline in mind can greatly increase the odds of succeeding in the markets.
Tip #1: Develop a “Trading Plan”
A trading plan is a set of rules that specifies a trader’s entry, exit and money management criteria. With today’s technology, it is easy to test a trading idea before risking real money. There is something called, “Back-testing” which is highly recommended.
By back-testing, you are applying your trading ideas to historical data, allowing you to determine if a trading plan is viable, and also shows the expectancy of the plan’s logic. Once a plan has been developed and showing good results, the plan can be used in real trading.
The key tip here is to stick to the plan. Taking trades outside of the trading plan, even if they turn out to be winners, may be considered poor trading and destroys any expectancy the plan may have had. You may get lucky once in a while but planning is the blueprint to your profitable success long-term.
Tip #2: Treat Trading Like a Business
In order to be profitable, you must approach trading like any full-time or part-time business. Don’t treat day trading like a hobby or even a job. As a hobby, there isn’t a serious commitment to learning the ebb and flow of day trading. Also, trading can be very expensive so you will be taking a financial risk.
As a job it may cause you some frustration because there is no regular “paycheck” on a specific date you to count on. Plain and simple, trading is a business, and incurs expenses, losses, taxes, uncertainty, stress, and risk.
True for any day trader, you are essentially a small business owner and should consider yourself to be an entrepreneur. You must do your research and strategize to maximize your business’s potential.
Tip #3: Use Technology to Your Advantage
Trading is always a very competitive business. You can assume the person sitting on the other side of a trade is taking full advantage of technology, and possibly algorithms. Charting platforms allow traders an infinite variety of methods for viewing and analyzing the markets. What’s more, predictive marketplace reporting does exist in today’s day trading.
Getting market updates with smartphones and specific apps allows you to monitor trades virtually anywhere. Even technology that exists today can be taken for granted, like high-speed internet connections, can greatly increase trading performance.
Using technology to your advantage, and keeping current with available technological advances, can be fun and rewarding in trading.
Tip #4: Use Trading Capital Wisely
Saving money to fund a trading account can take a long time and require a lot of effort. It is important that protecting your trading capital is not synonymous with not having any losing trades or lose money. That is part of the business.
Protecting capital actually means not taking any unnecessary risks and doing everything you can to preserve your trading business.
Tip #5: Study the Markets
Think of day trading as an ongoing, ever-evolving education. Profitable day traders always remain focused on learning more each day. They study the markets constantly. It becomes a way of life. Successful traders live and breathe markets.
Consider having a background in a particular market as a prerequisite. It is important to remember that understanding the markets, and all of their intricacies, is an ongoing, lifelong process.
Hard research, focus, and observation allows traders to gain instinct and learn the nuances. This in-depth knowledge is precisely what helps traders understand how economic reports affect the market they are trading.
The market environment is dynamic. The more traders understand the past and current markets, the better prepared they will be to face the future. World politics, events, economies and even the weather will all have an impact on the markets.
The byproduct of studying the markets and becoming a student of the game is profitability.
Tip #6: Only Use Capital You Can Afford to Lose
Actual money for a trading account can be a long process especially if it is coming from your personal funds or day-job. Before using hard cash, it is imperative that all of the money in the account be fully expendable. If not, the best advice is to wait until you have capital in which you can afford to lose.
The real money funding a trading account should not be for the kid’s college, paying the rent or mortgage, and normal bills. You must be prepared to lose all the money allocated to a trading account, as a golden rule. That way, you avoid any and all risk to important personal-life and real-world obligations.
Tip #7: Base Trade on Facts
Taking the time to develop a sound trading methodology is worth the effort. It may be tempting to believe that day trading is “so easy” and reading about a couple of simple tidbits of information on the internet. Nothing in life is that easy, as we all know.
The actual facts, not emotions or hope, should be the inspiration behind developing a trading plan. Profitable, long-term, and successful day traders will never be in a hurry to earn money.
The best in the business learn over time. With experience, successful traders have an easier time sifting through all of the information available on a variety of news resources, internet, and outlets.
For example, if you were to start a new career, more than likely you would need to study at a college or university for at least a year or two before you were qualified to even apply for a position in your new area of expertise.
So, you should also set your expectations accordingly; learning how to trade demands at least the same amount of time and factually driven research and study.
Tip #8: Use a “Stop Loss”
A “stop loss” is a predetermined amount of risk that a trader is willing to accept with each trade. The “stop loss” can be either a dollar amount or percentage. Either way, it helps you limit exposure during a trade. Using a stop loss will also take some of the emotion out of trading. Therefore, you’re analyzing the circumstances and situation like making a necessary business decision.
By ignoring a stop loss or not putting one in place, even if it ultimately leads to a winning trade, is bad practice in theory. Remember the plan and stick to it. Exiting with a stop loss, and thereby having a losing trade, is actually still good trading skill and planning.
Clearly, the preference is to exit all trades with a profit but that is definitely not a realistic approach. Stop loss techniques help to ensure that your losses and risk are limited. Over time, this methodology allows you to execute a profitable plan.
Tip #9: Know Your Limits
There are 2 reasons to stop trading:
- Ineffective trading plans.
- A lack of discipline as a trader.
An ineffective trading plan shows much greater losses than anticipated in historical testing. Markets will often change on a moment’s notice, you may experience volatility, or the trading plan simply is not performing as well as expected. You will benefit greatly by remaining unemotional and keeping a businesslike attitude. In this scenario, profitable day traders will take a pause to reevaluate the trading plan and make a few changes.
Oftentimes, starting over with a new trading plan may make the most sense. An unsuccessful trading plan is a problem that needs to be solved prior to continuing forward.
On the other hand, a trader who takes too many risks, lacks experience, hasn’t done enough homework or market study, is someone unable to follow his or her trading plan. The result is becoming a risky trader. At this point, go back to the drawing board and work on refocus on maintaining discipline during both the highs and lows.
Tip #10: Keeping Trading in Perspective
It is important to stay focused on the big picture when trading. A losing trade should not be a surprise us. It is always a part of trading. Likewise, a winning trade is just one step along the path to profitable trading.
It is the cumulative profits that make a difference over time. Once a trader accepts wins and losses as part of the business, emotions will have less of an effect on trading performance. Of course, you can and should be excited about a particularly profitable trading day but always keep things in perspective on an even keel.
An important part of day trading for profitability is by setting realistic goals. Additionally, goal setting is essential in order to keep trading in perspective. Work with what you have, and remain sensible.
Tying it All Together
Understanding the importance of each or these trading tips, and how they work together in an integrated approach, will definitely help establish a viable trading business. Trading is hard work no matter what the level of experience.
Profitable traders adhere to these guidelines. Profitable traders will possess the necessary discipline and patience and do take these ten actions into account on a daily basis. Ultimately, that’s why they are successful.
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