The Cautious Day Trader – How to Minimize Day Trading Risk
Day trading is just as exciting as gambling, and in many cases even more so. You can get a great rush from seeing a stock price rise and fall, and seeing your trading account filled with profits.
Unlike gambling though, trading has ways to minimize the risks that you take. Sure, there will always be risks in trading, and without risk it would lose much of it’s allure. But for the cautious trader, there must also be an element of safety in order for them to feel completely comfortable with their strategy.
How to minimize the risk of day trading:
Have separate capital
Many day traders go completely broke because there is no separation between their retirement money, mortgage money, living expenses money, and day trading money.
That’s why it’s essential to set aside a certain amount of capital that will be used for your trading activities. Once this amount is set, under no circumstances can you dip into your other sources of funds.
Having a set amount of money that is strictly for trading can actually make you more relaxed. Each trade doesn’t become a life or death matter, where you start to picture yourself without a house or car should the market suddenly decide to swing in the opposite direction.
Use stop losses
Because trading markets have a habit of suddenly turning, it is important to always use stop losses in your trading activities. A stop loss is where a stock price drops a certain percentage below the price you bought it at, then you will automatically sell that stock.
This protects you from making huge losses in any one trade, so you don’t end up losing your shirt and bankrupting your account.
Stop losses should be used as part of any successful strategy, in order to minimize risk and trade smarter.
A trader who knows everything about his market is always going have the advantage over the traders who just know bits and pieces.
Becoming an expert is the best way to reduce your risk. As they say, “knowledge is power” and having the right knowledge in relation to the stocks you are buying and selling will result in more successful trades and less losses.
Refer to as many industry reports and publications as you can lay your hands on, and always be on the lookout for breaking stories.
Don’t hang around
The last thing you want to do is hang around when the market is telling you to get lost!
Some days it just seems like you can do nothing right, and everything you touch goes badly wrong. When this happens, refrain from trying to make your losses up, and instead walk away for the day and go focus on something else.
Many people stick around when they are losing, which is the reason they go broke. Instead, minimize your day trading risk and go play a round of golf.