You’ve probably seen the ads online about people making six figures a year buying and selling stocks or other assets in the comforts of their home and thought to yourself, “I can do that.” Day trading, however, can be very risky. A common statistic floating on the web is that more than 90 percent of people who try their hands on day trading end up blowing their account in as early as six months. Here are some basics you should know before opening an account.
Treat It Like a Business
Day trading isn’t your personal ATM, where you can just profit every day and cash out. It’s a business that has periods of profits and losses. Treat it as you would any traditional business that you’d start. Lay the groundwork by researching your prospective assets, calculating dollar risk and reward per trade, establishing timelines per trade, and looking for an edge that increases your strategy’s expected future gains.
Set Aside Capital
How much money you start day trading with has a greater impact on your returns/losses than most would think. Because of the fairly low minimum capital requirements imposed by most brokers, it can be easily tempting to open an account with $50. And while this is completely harmless, it does lead to overtrading in an attempt to compensate for the low profits earned from small positions. Ultimately, this overtrading leads to a higher level of risk.
Avoid Cheap Stocks
Cheap penny stocks, as the name implies, will cost you no more than $5 apiece. It’s also quite tempting for novice day traders to try and leverage their trades by going for cheap stocks that they can buy a larger amount of. Many penny stocks eventually become delisted from stock exchanges, which can severely affect its liquidity.
The main differentiator between winning and losing day traders is how well they manage risk. Cut losses early before they wipe out a good chunk of your trading capital. Manage risk per trade by using market orders and stop losses.
As a final piece of advice, avoid being emotional when you trade. Markets can be volatile at times, and this can test the nerves of even some of the most experienced day traders out there.