Make a take-profit plan and stick to it
When the price is going up, it is very tempting to throw caution to the wind and keep the position open just a little longer, just a little longer, just a little longer. We become greedy. Instead of closing the position and congratulate ourself on making a nice little profit, we elect to keep it open – sometimes with devastating results.
- Make a take-profit plan and train yourself to stick to it. The plan should be clearly defined and written down. Being a profitable day trader in the long run doesn´t require you to max out every possible profit.
- Learn about the tools available to you, such as automated take-profit orders.
- Learn about techniques for day trading in an upward market. Closing a position and taking the profit doesn´t mean you have to stop trading. You can enter the market again, albeit at a higher price point than before.
Learn the pros and cons of using stop-loss
Stop loss can be a great tool for day traders, but it is not without drawbacks.
When you put in a stop loss order with your broker, you tell them to automatically try to close this position if the market price drops below a certain limit. It is considered a way of managing risk, since you know that your position will automatically be put up for sale if the market price takes a sufficiently deep dive.
Without a stop-loss in place, you need to monitor the market closer to be able to jump in a place a sell order manually if need be.
A few things to remember:
- If the market has high-liquidity, you can expect your position to be closed very quickly when the stop-loss price point has been reached. If there isn´t enough liquidity, the position might not be closed until later – and by that point the price might be significantly lower than your stop-loss point. A stop-loss does not guarantee a sale at or even near the selected price.
- A lot of traders use stop-loss. This means that when the price of a security drops, a lot of stop-loss orders become activated, and this promotes a further drop in market price since the market is flooded with sell-orders. This can become a self-propelling but typically short-lived price dive. Traders that do not have stop-loss orders in place can simply ride it out.
- Sudden news events can easily cause a sharp, but short-lived price drop. If you have a stop-loss order in place, your assets will be put out for sale. Without a stop-loss order in place, you can elect to ride it out instead.
Don´t risk money you can´t afford to lose
Risking money you can´t afford to lose is of course bad for your private economic situation, but you already know this so we don´t need to point that out.
Instead, what we want to highlight is that risking money you can´t afford to lose will make you a worse trader. You will be emotionally invested in a different way and it will be much more difficult for you to keep your head cool and stick to your predefined trading strategy when things get hot & shaky on the market.
Learn about taxes
Before you start day trading, learn about the relevant tax system.
In many jurisdictions, day trading can lead to horrible tax consequences unless your are doing it right. For instance, it is important to put yourself in a situation where you are able to deduct losses and costs correctly.
The best set-up for day trading will depend on the rules of the tax system that pertains to you. Giving general advice is therefore not possible.
Chose a trading platform that is suitable for YOU
This might sound like a no-brainer, but many novice day traders lose valuable time fiddling around with a day trading platform that doesn´t work well for them. In day trading, every second counts, so you don´t want to be stuck with a trading platform that you find tricky do navigate.
- Make a demo account and explore the trading platform using free play-money before you make any deposit.
- If you plan on trading on your phone, explore the trading platform on your phone. Some platforms are great on a big screen and not so great on a small screen.
- Just because Sarah loves Platform A it doesn´t mean that Platform A is optimal for Marcus too. We all have different preferences, so do your own homework.