subject: Learn To Erase Risk In Day Trading [print this page] First manage your risk, only then think about how much profit you can make. This is the most important rule for any trader whether day trading or swing trading. Many new traders ignore the importance of sound risk and money management in the start of their trading career. But after losing many trades, they realize the importance of good risk and money management.
Day trading requires long term commitment. You have to be persistent. You need to improve continously. That's why risk management is important. If you do not preserve your capital, you will not be able to survive long in this game and you will be unable to reap the real profits.
The first rule of risk management in day trading is that you should treat your day trading venture as a business. Do not think of day trading as a hobby. It is not! Day trading is a serious business and you should make a good business plan for it with proper deadlines and targets that you need to meet. Risk and money management should be an important part of your business plan. You need to put different control levels in your risk and money management plan like how you are going to manage the balance in your account.What should be the minimum level before which it should not fall. Then you should know how to manage losses in each trade. Every trade needs to be managed. You need to develop a business plan that ensures that you are in the day trading game in the long term. If you can survive the first few tough months in the beginning of your day trading venture, you are all set to becoming a winner day trader!
So how do you manage your account balance? Each trader will have to determine the amount of money, he or she is willing to risk. You see, I may be comfortable with one level of risk and you maybe comfortable with another level of risk. Now, you need to determine the amount of money that you can afford to lose without getting emotionally disturbed and losing your sleep. Call this number, "The Tilt Number." Keep this number in mind and once you lose this much money in a single day, stop trading. Your trading strategies might be flawed. You need to re-evaluate your methodologies before you trade again.
Another rule that you can follow is," Three Strikes and you are out." What this means is that if you lose three trades in a row, stop trading. Re-evaluate your trading strategies and style and only trade after a thorough analysis of what went wrong and how you are going to correct it.
Always calculate your Risk to Reward Ratio before you enter in a trade. Do not trade if the Risk to Reward Ratio is more than 1:3. What this means is that you have a chance of winning 3 trades against losing 1 with this Risk to Reward Ratio. Any thing more than this should be considered as too risky.
Learn the use of Stop Loss. Never ever trade without a stop loss order in place. Manage each trade. If the markets are unpredicatable or you have difficulty understanding the market mood, don't trade!
by: Ahmad Hassam
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