For years, people didn't take day traders seriously. They were often mocked in the investing community. They had a reputation for trying to make a quick buck without putting in the hard work. But over the past few years, things have changed. People have finally realized that there's a significant amount of skill and patience that goes into being a profitable day trader. Therefore, more and more people are looking to try their hand at this investing niche.
Here's What it Takes
Day trading isn't for everyone. The volatility can be upsetting to some and exhilarating to others. You'll have days where you'll make thousands of dollars in a matter of hours, and other days where you'll feel like you're going to bleed out. This unpredictable nature of day trading scares many away, while motivating others.
It's hard to perfectly replicate someone else's success as a day trader, but there are plenty of lessons to be learned from studying others. Here are some of the principles you'll discover:
1. Never Dig Your Way Out
In day trading, as in gambling, the worst thing you can do is try to dig yourself out. Chasing losses rarely ends in a positive gain and almost always makes things worse. If you find yourself in a hole at the end of a day, week, or month, it's best to accept the loss and start fresh the next day.
Unsuccessful traders quit during a losing streak. They can't stand failure and aren't willing to learn from their mistakes. Unfortunately, this is the wrong approach - you need to keep pushing through.
"The only way to really come up with the right response is to be able to go back and analyze a lot of trades that would have been generated by your method," NetPicks explains. "The responsible trader, or should I say, the professional, serious trader who truly has the will and desire to succeed and make money at this endeavor, should do a good amount of 'foundation building.'"
2. It's Not About Entertainment
It's amazing how many people get involved with day trading because they're looking for entertainment. They want something fun to do and feel like day trading will provide that adrenaline boost. If you want entertainment, start gambling or betting on horses. If you want to make money, be selective and put in the hard work required to be successful.
"I know that many traders, particularly new traders, want to eschew this testing and building and formulating because, well it's not all that much fun," currency strategist James Stanely says. "But trading is not supposed to be entertainment. If you want entertainment, there are movies and music and all kinds of other things in this world to enjoy. Trading is a way to make (or lose) money."
3. Protect Your Capital
You're going to make losing trades - there's no way around it - but you have to do whatever it takes to protect your capital. This means avoiding unnecessary risk and doing things outside of day trading to build up investing capital and create a nice cushion or safety net. Stop-loss and take-profit levels are the best way to do this.
"Traders should always know when they plan to enter or exit a trade before they execute," trader Justin Kuepper says. "By using stop losses effectively, a trader can minimize not only losses, but also the number of times a trade is exited needlessly. Make your battle plan ahead of time so you'll already know you've won the war."
Is Day Trading for You?
Do you have what it takes to be a successful day trader? It's a challenging niche that attracts thousands of people, yet few are actually successful. If you decide to give day trading a try, make sure you're honest with yourself and take into account the rules and principles discussed in this article. They'll guide you in your pursuit of financial freedom.