How to Make Money Day Trading
Can you make money day trading? Statistics tell us that 90 percent of day traders fail. Why do so many day traders fail? Let me give you 5 steps to make money day trading and be part of the 10 percent.
1. Take Your Time
If you’re new to trading or have been trading for less than a year, why did you start trading? Was is the expensive cars? Was it the travel lifestyle? Was it escaping the 9-5? All of these can be valid reasons but what you don’t see in advertisements is the pain, the struggle, the tears, that went into learning this craft.
Here is my question for you, how many months or even years are you willing to put into this endeavor? Do you really think you will be crushing the markets in two months? Do you seriously think you’ll be able to buy your dream car in six months? Are you already creating a list of countries to visits? Have you already decided that you plan to quit your 9-5 next year? STOP! If this was easy everyone would be doing.
To make money day trading you have to take the long view. Look at it as a college degree. Plan to take 1-4 years learning everything you can. Plan to spend money on education. Plan to lose money in the stock market. If I told you that this will take 10 years to learn but that you’d be able to work 1-2 hours every day the rest of your life make $500-$2000 per day would you pursue it?
Take your time, do not try to figure this out in a few months. The reason that 90 percent of day traders fail is that they are greedy! They want to make money fast without any effort. Put in the effort, put in the time, learn from others, never get prideful, never think you’ve figured it out, stay nibble, and you will succeed.
2. Paper Trade Before You Live Trade
Before taking a single trade, practice with paper trading. Why trade with real money when you could learn to trade with a paper trading account? There is a difference between paper trading and live trading! The main difference between paper trading and live trading is your emotions. I can still remember the first time I took a live trade. My heart was pounding and I questioned everything. Is it going to go higher? Is it going to go lower? When do I cut it? When do I take profit?
Do not paper trade randomly. Learn to create a trading plan and practice executing that plan. Document your paper trades with a trade journal and paper trade as if you were using real money for your account size. How exactly do you paper trade? Here is an article that shows you exactly how to paper trade.
3. Set Realistic Expectations
Once you’ve decided to take your time and paper trade for a while what expectations should you have for your first few months of live trading? Expect to lose money. Paper trading is different from live trading because of your emotions. Use a very small share size so that you won’t blow your account if you take five straight loses. Start with 40-100 shares as your full-size. Always enter a trade with quarter size and then add to it according to your plan. If your full size is 100 shares enter the trade with 25 and scale in accordingly. This prevents you from getting emotionally invested in the trade.
Once you’ve mastered small share size and are consistent with your trading then increase share size. The goal and expectation at the beginning should be to lose as little money as possible. Focus on the processes and the setups and don’t worry about trying to make money.
4. Manage Risk Properly
Risk management is the #1 skill a day trader needs to have. Risk management is the ability to take losses but not big losses. When creating a trading plan, always set a stop. Write down your stop in your plan and get out of the trade when your stop is hit. Remember, you can always re-enter a trade again at a lower price. Don’t hold and hope. If your trading plan does not go as you expect, take the loss and live to fight another day.
To help you understand what your risk to reward ration should be on each trade, I’ve created a very helpful risk/reward calculator. This tool will help you understand the power of risk management. Once you realize that loses happen and that it’s ok to take a loss if it’s according to your trading plan, you will have more confidence taking a trade and cutting for a loss.
5. Take Profits
This step is probably the second hardest to learn after managing risk. Not only do traders need to know when and how to take losses but they also need to know when and how to take profits. So many new traders, get in a trade, they see the dollars flowing in, but they are not sure when to close the trade or start taking profits.
New traders need to have a trading plan that is written down and that is followed. The plan needs to include steps for either taking profits or setting trailing stops. Do not get greedy because what goes up comes down. If you enter a trade and it’s working according to your plan, take some profit! One of the worst feelings in the world is getting in a trade and going from green to red. Always pay yourself something.
If you’d like more info, Pat Mitchell from TrickTrades.com discusses his reasons why new traders fail.