How to Save More Money by Day Trading?
Increasing savings should be the guiding principle in any investment strategy, and day trading is not an exception. However, it is the prospects of high profits that attract thousands of day traders every year. Sadly, though, only a few of them manage to make a decent living, let alone saving, from trading activities.
The colossal failure of beginners is due to their inability or reluctance to do a few things: practicing incessantly before attempting actual trading, developing a strategy and sticking to it, and dedicating enough time to research and analysis. As a day trader, it is possible to save more compared to long-term and swing traders as long as you infuse the following tactics into your trading plan.
Plough Back Trading Profits
Image via Flickr by Damian Gadal
Gains should be re-invested and not withdrawn. That is the surest way to build up your capital. The main advantage of intraday trading over long-term investment is that returns compound quickly. A trader that sustains 0.5 percent—assuming one trade is entered—in daily returns, for example, gains 16 percent at the end of the month. Achieving 1 percent in capital gains consistently translates to almost 35 percent over the same period.
Control the Amount of Capital Exposed to Risk Per Trade
Ideally, do not expose more than 1 percent of your capital to risk in any trade. Exposing any more than that will most likely erode your savings. If your trading account has $20,000, for instance, allow up to a maximum of $200 in possible losses in all trades. The best way to achieve this is by setting a stop–loss level. So, if a stock is selling at $15, your stop–loss level should be $14.85.
Set a Realistic Risk:Reward Ratio
After setting the maximum loss possible, you need to set a realistic profit level. While professional traders may anticipate 5 percent returns on a trade, the ideal point for a novice should lie between 1.5 and 3 percent. Going by the example above, your profit level should range between 15.225 to 15.45. The former gives you a risk-reward ratio of 1:1.5 and the latter 1:3. If you happen to lose a trade, you only lose $0.05, but if you win, you go home with $0.225 or $0.45 per share.
Aim for a Higher Win Rate
You should aim to enter as many trades as possible. Day trading attracts a large number of players that reverse fluctuations quickly. As a result, price changes are only marginal. To make tangible profits, you should aim to win more than half (50 percent) of your trades. With a risk-reward ratio of 1:3 and a win rate of 60 percent, for instance, you increase your capital account by 130 percent (60 × 3 percent = 180 percent – 50 percent = 130%).
While these tactics are not conclusive, following them through will see your savings increase tremendously over time. You can even check out some of the best day trading books to help you along. As a good trader, you should always aim to make informed decisions on the securities to long or short.