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As a day trader you will rapidly buy and sell stocks throughout the
day. You’ll trade in the hope that your stocks will climb, allowing you
to lock in quick profits. Many professional day traders borrowed money
to trade, hoping they’ll reap higher profits by trading with more
money. The downside of borrowing money to trade, however, is you put
yourself at great risk for huge losses - and they do happen.
Day trading isn’t illegal or unethical, but it is extremely risky. Most
investors trading on their own do not have the money, time, or patience
to sustain the devastating losses that day trading can bring.
There are several things you need to know about day trading to mitigate
your losses. First, you must be prepared to suffer severe financial
losses. The vast majority of day traders suffer severe financial losses
in their first months of trading. Most don’t keep at it long enough to
graduate to profit-making status. When you decide to pursue day
trading, you shouldn’t risk money you can’t afford to lose. The same
advice is often given to gamblers.
Never trade with money you need for:
• daily living expenses, and
• retirement
Never use these things for trading capital:
• money from you mortgage
• student loan money, or
• college savings money
When you start out as a day trader, you also need to realize that you
aren’t investing in the stock market. That is not what a day trader
does under any circumstances. You’re job will be to sit in front of a
computer screen and look for a stock that is either moving up or down
in value. You’re looking to ride the momentum of a stock and get out of
it before it changes direction.
Even if you study a stock for hours, days, and weeks on end, you do not
know for certain how it will move; you’re gambling by hoping it will
move in one direction, and you are often risking money that it will go
in the direction you want.
Remember that day trading is an extremely stressful and expensive
full-time job. Day traders employed by companies must watch the market
continuously during the day and this is difficult and demanding enough.
Even if you’re not working in an office – particularly if you’re not
working in an office – you need to develop great concentration to watch
dozens of ticker quotes and price fluctuations.
You need to be able to spot market trends by disseminating all of the
information that’s there in front of you.
If you operate as a day trader, whether you work in an office or at
home, it’s important to recognize that you’ll have high expenses,
particularly in your first few months. Whatever your situation, you’ll
pay your firms large amounts in commissions as you start up.
You’ll probably also pay for training, and for computers.
Before you begin trading, before you make your final decision about
taking on this profession, you need to have a written statement
detailing what your expenses will be and a plan for how long it is
going to take you to break even.
Particularly if you’re trading on our own, avoid, if at all possible,
borrowing money or buying stocks on margin. Borrowing money to trade in
stocks is always ill-advised, although day trading strategies demand
the use of leverage to make profits. But bad planning leaves many day
traders in debt.
To avoid catastrophe, you should concentrate on understanding how
margin works, how much time you’ll have to meet a margin call.
Above all, don't buy into the circulating myth that you can quickly
profit from day trading. Day trading can bring sizeable profits; it
does. But you have to work at becoming a successful day trader.
Watch out for "hot tips" and "expert advice" from newsletters and
websites. Your best bet is to stay away from websites claiming to offer
hot tips and stock picks, most particularly when you are expected to
pay a fee, which is most of the time. If you do come across a pick that
you think is valid, be sure to meet your due diligence: check out the
sources of information and ask point blank if they have been paid to
make recommendations.
When it comes to dealing with losses psychologically, a few statistics
might help you. It sounds fairly depressing, but an important part of
making a profit from day trading involves losses along the way. In
fact, if you have even 50.5% winning trades, you’ll win in the long
run. Your goal should be to increase your margin of wins but remember
that 50% overall wins is perfectly respectable, particularly as you’re
starting out.
In any day trading system, you will experience losing trades as well as
winning ones. The faster you realize this, the better. Psychologically,
you need to be prepared to lose and give up on a particular stock if it
isn’t going anywhere. This is truly the skill and essence of a good
trader, particularly a good day trader.
If you are having trouble on a particular day and you’re feeling your
emotions headed out of control, adopt a tactic used by many poker
players: get up from your desk and walk away. It might be a few
minutes, it might be longer. Take a break if you are suffering losses;
if you feel like breaking your disciplined habits.
To summarize:
• Never trade with money you can’t afford to lose.
• Always have a plan of action for your trading.
• Always follow your plan of action.
• If the stock falls and you were expecting it to rise, drop it.
• Don’t hold on to losing stock.
• Even if your stock continues to rise, you should still sell in
accordance with your plan.
• Don’t hold on to winning stock longer than you planned; things can
all too easily turn against you.
• Set a limit for how much you can afford to lose in a day.
• If you lose your limit, get up and walk away; stop trading.
• Accept that you will lose money sometimes and be prepared.
The information
in this guide and on this
site should not be construed as financial advice and are for
information purposes only. The authors and publishers are not financial
advisers. You should rely on your advisers and lawyers for financial
advice.
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