Day Trading 101: A Beginner’s Guide

Day trading has been around for over 150 years, dating back to the earliest days of the stock market ticker, when only brokers made trades on the exchange floor. 

The increased accessibility of stock markets makes day trading appealing for those seeking quick profits. However, the risks are considerable, and traders can face significant losses or even debt within hours.

This guide offers a comprehensive introduction to day trading, from the basics and risk management to choosing the right tools and strategies. It aims to help both new and experienced traders build a strong foundation, avoid common mistakes, and navigate the challenges of day trading effectively.

WARNING

Trading exposes you to the risk of losing more than your initial investment and incurring financial liability. Trading is suitable only for well-informed, sophisticated clients able to understand how the products being traded work and having the financial ability to bear the aforementioned risk.

Transactions involving foreign exchange instruments (FOREX) and contracts for difference (CFD) are highly speculative and extremely complex. As such, they are subject to a high level of risk due to leverage. Please keep in mind that CFD trading is banned in the US.

Information published on the NewTrading.io website is for informational purposes only and should not be construed as offering investment advice or as an enticement to trade financial instruments.

What is Day Trading? 

Day trading involves making multiple transactions—buying and selling financial instruments—within the same trading day. The basic objective is to make money on the upward or downward price movements that take place throughout the trading day. 

Some day traders enter and exit trades in a matter of minutes or even seconds. Others hold positions for an hour or more. Regardless of a trade’s duration, however, all positions are closed at the end of the trading session or day. 

Noteworthy

Day trading, as we know it today, entered the public sphere in the 1970s with the invention of electronic communication networks. Suddenly, anyone with access to a terminal could make trades—without a broker and without being physically present on the trading floor. The Internet further democratized access to the markets, and by the late 1990s, day trading had become a full-fledged and widely practiced trading technique.

Today, anyone with an internet connection can start day trading using professional-quality tools and platforms, but access doesn’t ensure success. Traders must dedicate time to develop their skills and discipline to effectively manage risks.

Day Trading vs Investing

Day trading is not investing, at least not in the traditional sense. The fundamental difference is that day traders make money with quick, short-term profits, while investors build wealth through long-term gains. 

But it’s not just their timeframes that differentiate trading from investing. Investors typically pay attention to an asset’s underlying fundamentals and long-term prospects. Traders, on the other hand, care about price movements—up or down—and how they can profit from them. 

More simply: Investors care about how a business performs. Day traders, on the other hand, care about how the stock performs. 

• Investors rely on fundamental analysis, studying a business’s financial data, to help them decide what to buy and when to sell. 

• Day traders favor technical analysis—studying patterns in market data like price and volume—to identify trading opportunities.
  

Investors also tend to take fewer risks than day traders; day trading is risky business, even with the best risk mitigation strategies in place. That’s because day trading requires intraday volatility—significant up or down price movements—to succeed.

You can’t make money on price movements if a stock price stays static all day. Investors aren’t usually keen on volatile markets, but volatility is a day trader’s best friend.

Pros and Cons of Day Trading

Pros	Cons
You can make quick profits.  Day traders can make a lot of money a lot faster than a ‘normal’ investor. That profit potential is a huge reason people want to get into it.	You will lose money. Guaranteed. About of day traders lose money every quarter and a sizable number lose everything within the first year. It takes dedication, skill, and more than a little luck to succeed at day trading.
You can do it anytime, anywhere. With modern trading platforms, you can day trade from just about any device anywhere you have a reliable Internet connection. And, a good day trader can find opportunities in any market, bull or bear.	If you do it right, it’s incredibly time-consuming. It takes a long time to learn day trading basics, develop and test strategies, and monitor the market to find trading opportunities. If you want to be successful, you can kiss your free time goodbye.
There’s no overnight exposure or risk. Day traders usually close their positions at the end of the trading day so they don’t have to worry about losing money if something happens in the markets overnight.	You can wipe out your profits with taxes and fees. Transaction fees, margin fees, and subscription fees for platforms and tools can quickly cut into your profits. And don’t forget you’ll pay the higher short-term gains tax rate on everything you make.
It’s never boring. Day trading is hands-on, fast-paced, and exciting, especially compared to buy-and-hold investing. There’s nothing like the thrill of doubling your money in a single day.	The potential for addiction is real.  For some people, day trading affects the brain in the same way gambling does, and the consequences of addiction are just as devastating.

What Makes a Successful Day Trader? Is Day Trading Right for You?

It’s easy to see why day trading is so appealing, either as a part-time gig to earn extra cash or a way to take control of your career and escape the corporate grind. 

But it’s really not for everyone. Profitable traders—the ones who have mastered their techniques and have the track record to prove it—are self-disciplined, level-headed, persistent, and independent. 

They’re also at least somewhat financially secure. They can comfortably pay their monthly bills and have adequate emergency savings plus some extra cash to risk in the market. If you’re living paycheck to paycheck, take the time to get your finances in order before you dip your toes in the market.

Noteworthy

No one should ever day trade with money they can’t afford to lose.

Wondering if you have the right personality to make it as a day trader? These are a few traits that make them successful:

• They are detail-driven specialists. 
  The best day traders are devoted to a single market or asset class and a trading style that works with their temperament. A big part of the day trader’s job is finding the market and trading technique they can get passionate about and truly master. 
  
• They are disciplined and develop strict routines.
  Good day traders have rituals that guide how they prepare for, monitor, and execute trades during every trading session. They understand that consistency is the key to avoiding mistakes, so they stick to proven routines for creating and filtering watch lists, monitoring opportunities throughout the day, and executing their plans. “Winging it” is never an option. 
• They are masters of risk management. 
  While day trading is inherently risky, the best day traders are surprisingly risk averse. They have ironclad rules for getting in and out of trades, protecting their capital, and knowing when not to trade. As Paul Tudor Jones, one of the most successful day traders of all time, once said, “Where you want to be is always in control, never wishing, always planning, and first and foremost, protecting your butt.” 
• They are curious and resourceful.
  Successful traders are passionately interested in their niche and enjoy the endless research required to master it. They know where to go for the most up-to-date, reliable market information and which tools and indicators work best for their chosen strategies and techniques.  Nor are they afraid to ask questions, probe different scenarios, and test every assumption. 
• They are focused, calm, and collected. 
  New day traders are easily excited by the next shiny object, but successful ones stay focused on what they know works. They don’t lose their cool and ditch the plan when they are winning—or losing—big on a trade. And they keep their emotions under control so they can adapt and execute, even in shifting market conditions.  
• They are patient to a fault. 
  Day traders are never in a rush. It can take months to research, develop, demo trade, and backtest a new plan, but they won’t risk real money until they’ve put in the time to know it works. And once they’re in the market, they never force a trade—even if it means waiting hours for the right opportunity to materialize. 
• They are tech-savvy and open-minded.
  Day traders rely on a lot of complex technology and they’re always looking for a competitive edge. They understand how platforms work, how to program indicators and functions, and how to evaluate and choose the technology and tools they need to be successful at their job.

Ultimately, though, experience is the most important thing for a day trader to be successful. However, frustration and disappointment keep most beginners from staying the course and acquiring it. If you can train yourself to develop the traits of successful traders, you’ll be able to endure the pain that inevitably accompanies the learning curve. 

As Paul Tudor Jones says:

“The secret to being successful from a [day trading] perspective is to have an indefatigable and unquenchable thirst for knowledge. Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever think you are very good. The second you do, you are dead.” 

How much can you make day trading?

Let’s be honest: Everyone’s seen stories on social media of day traders making tens or even hundreds of thousands of dollars in a single day. These get-rich-quick stories cause a lot of people to lose a lot of money trying to beat the market. 

Can people get rich by day trading? Sure. But unless you’re a professional trader or hedge fund manager—or an exceptionally disciplined self-employed trader—It is far from the norm and should not be expected by most.

How much you make day trading depends on the amount of money in your trading account, your trading strategy, your risk management plan, and how much time you spend trading every month.

For example, a common yet ambitious goal among day traders could be to earn a 1% daily return. This target might seem modest but is exceedingly difficult to achieve consistently due to market volatility, trading costs, and psychological pressures.

Here’s what a 1% daily return might look like, theoretically:

• $25,000 account could yield $250 per day.
• $50,000 account might result in $500 per day.
• $100,000 account could lead to $1,000 per day.

However, these figures do not account for the compounding of losses, potential fees, taxes, or the psychological strain of high-stakes trading. Additionally, achieving such consistent daily gains is challenging and unlikely for most traders.

On the other hand, if you’re trying to get started with $5,000 or less (which we’ll discuss later in this guide), 1% per day is just $50 every day you trade. It’s very, very hard to make money day trading and still protect your capital when you have a small balance in your trading account.

So how much can you make day trading? Let’s look at a specific example of how much you could potentially earn.

Matt began his day trading with $25,000, aiming to supplement his income by trading three days a week. He adopted a disciplined approach with a focus on risk management, ensuring that he never won or lost more than 1% of his capital on any given trading day. Similarly, he aimed for a gain of 1% on his successful days, striving to hit this target approximately 60% of the time.

Month	Total Trades	Wins	Losses	Win Rate	Starting Balance	Ending Balance	Total Monthly Gain (%)
1	12	6	6	50%	$25,000	$25,369	1.48%
2	12	7	5	58%	$25,369	$26,014	2.54%
3	12	5	7	42%	$26,014	$25,954	-0.23%
4	12	7	5	58%	$25,954	$26,605	2.51%
5	12	5	7	42%	$26,605	$26,540	-0.24%
6	12	6	6	50%	$26,540	$26,914	1.41%
7	12	9	3	75%	$26,914	$28,289	5.11%
8	12	8	4	67%	$28,289	$29,397	3.92%
9	12	5	7	42%	$29,397	$29,328	-0.23%
10	12	7	5	58%	$29,328	$30,008	2.32%
11	12	6	6	50%	$30,008	$30,387	1.26%
12	12	8	4	67%	$30,387	$31,600	3.99%

While Matt’s disciplined strategy helped him increase his initial capital to approximately $31,600 by the end of the year, it’s crucial to recognize that his success was contingent on maintaining a win rate above 50% in most months. Had his win rate consistently fallen below 50%, he would have experienced a net loss, underscoring how critical it is for day traders to maintain a high win rate. This thin margin between profitability and loss highlights the risk involved in day trading and the need for rigorous discipline and a well-planned risk management strategy.

The bottom line? While some traders may be able to make enough profit from their activities. Others don’t make enough to cover their brokerage fees. A careful plan, solid risk mitigation strategies, and a disciplined approach separate the winners from the losers. 

How much money do you need to start day trading?

In the US, you need at least $25,000 to day trade stocks with a margin account. If you have less than that and you make more than four trades a week, you risk getting flagged as a pattern day trader (PDT). Once you’re flagged as a pattern day trader, you’ll be restricted from trading until your balance hits $25,000. 

Noteworthy

The $25,000 rule is specifically designed to protect less experienced traders from overtrading and potential significant losses.

Now, there are ways to get around FINRA’s PDT rule. The easiest one is to trade stocks with a cash account instead of a margin account. The only problem with going that route is that you can’t use leverage to maximize your profits. 

What is FINRA?

FINRA is the Financial Industry Regulatory Authority, which was authorized by Congress to oversee American brokers and broker-dealers and to help regulate the US financial industry.

For example, if your cash account balance is just $5,000 and you can’t buy on margin, your position size will necessarily be small unless you’re risking your entire stake. It’s very hard to make money and still cover your butt when you’re trading in a cash account with less than about $10,000 or $20,000.

What is buying on margin?

When you trade with a margin account, you can borrow money from your broker to buy stocks. Buying on margin is a form of leverage that allows you to amplify your profits (or your losses if the trade goes bad). Most brokers let you borrow up to 50% of the purchase price of the stock up to the value of your trading account.

For example, if you want to buy $5,000 of stock, you need to have at least $2,500 cash in your account (initial margin) to borrow the other $2,500 on margin. Leverage is a powerful tool in the day trader’s arsenal, but you have to be diligent about using it responsibly and managing your risks because it’s possible to lose more than you originally invested.

Another option is to open an overseas trading account. FINRA’S PDT rules don’t apply outside the US, so you can get around them by using an international broker. Most international brokers allow you to open a margin account with as little as $500, and many will allow you to trade in US markets. However some do not, although they will still allow you to day trade in other markets. 

There are two big problems with international brokers, however. First, they don’t allow for commission-free trading, so you’ll need to factor in those higher costs. 

The second is they create a tax and accounting nightmare. Overseas brokers don’t issue 1099 tax forms to US residents, so you’ll need to be meticulous about your trading records or risk running afoul of the IRS.

Finally, you can also trade in markets other than stocks. Futures, forex, and crypto markets aren’t subject to PDT rules, so you can start them with much less money.

Be wary of online articles promising to show you how to start day trading with $500 or $1,000. Honestly, it’s not realistic, and you’ll have to take inordinate risks with your capital. You’re just as likely to lose everything as you are to turn a profit. 

The smartest way to do it is open a demo account and practice paper trading until you build up enough capital to day trade without running afoul of PDT rules or risking too much of your money. 

How to Get Started Day Trading

If you’re going to start day trading, it’s a good idea to approach it as you would any other business venture. Be strategic and do your research. And follow these six steps to put yourself on the right path.

1. Pick a market. 

Most successful day traders are experts in one particular market and/or asset class. Stocks are one of the most common choices, but many other markets work especially well for day trading. Think about your interests and what excites you. You’re going to spend a lot of time studying and researching, so pick something you can wrap your brain around without getting bored. 

In general, day traders look for three things:

• Volatility—Is there enough up-and-down price fluctuation to create opportunities to profit from intraday movement?
• Liquidity—Is there a trading volume that is high enough so you can buy and sell easily without affecting price levels? 
• Trading data—Are there reliable online resources for market updates and trading volume?
  

2. Choose your trading strategy. 

Day traders choose and apply a defined strategy to identify profitable opportunities (we’ll discuss some of the most popular below). Each strategy uses a different set of indicators and rules to determine when to enter and exit a trade. 

Some strategies, like trading the news, are more time sensitive. For example, if you’re trading for a certain period of time on certain days of the week, this strategy might not work for you, becauseyou have to be available to trade when news breaks.

Others, like scalping, aren’t time-sensitive, but they are time-consuming. Scalping involves buying and selling hundreds of times a day trying to capture profit from tiny price movements. It takes a lot of time and intense concentration to scalp successfully.

It’s a good idea to look at the range of techniques and choose one that works with your market, your personality, and your available trading time. 

3. Choose your trading tools.

Every day, traders need a trading platform, charting tools, and stock scanners. You’ll also need a simulator or demo account so you can paper trade to test and perfect your strategy. 

Because different strategies use different indicators, it’s a good idea to pick your tools after you’ve chosen your market and trading strategy. That way, your tech will match your technique, and you’ll be better positioned for success. 

4. Find your community.

Don’t waste time reinventing the wheel. Join a community of experienced traders with whom you can exchange tips and ideas, troubleshoot strategies, and share war stories. Many trading platforms have active user communities that are a goldmine of useful information while you learn. 

The key is to find real traders, not braggarts and blowhards who don’t actually prove out the strategies they promote with their own money. 

Look for authentic, engaged users who share their wins as well as their losses. Be skeptical of quick-win communities that exist to promote a novel strategy. We tend to emulate the people we associate with, so choose your community carefully. 

5. Practice on your demo account.

When you feel confident in your trading strategy, practice paper trading with a demo account. The best Demo accounts help you develop solid day trading routines and build the habits of successful traders. 

Demo accounts also allow you to backtest and prove your plan, so you can trade with real money more confidently. 

Never practice with real money. It’s the ultimate newbie mistake, and it leads to painful and completely avoidable losses. Don’t let your trading career end before it begins. Use the demo account as long as it takes to master your technique and fine-tune your plan.

6. Transition with restraint.

When you’re sure your plan is solid, start the transition to trading with real money. But take it slow and easy! No matter how confident you are with paper trades, your emotions will be entirely different when you’re risking real money. 

Give yourself time to adjust and see how you respond. Scale up slowly so you know you can keep calm and collected, no matter how the market moves. 

Day trading strategies for beginners

Before we jump into day trading strategies, let’s define exactly what we mean by that term. A trading strategy is simply a set of rules and guidelines that inform and guide all your trading decisions. 

Strategies are usually based on factors like technical analysis and market sentiment. And, they cover every action from when to enter and exit a trade to how much to risk and how to manage your open positions. 

But successful day trading strategies are more than just a tactical decision tree for executing trades. A well-developed strategy covers everything from selecting which assets to put on your watch list to choosing the correct indicators to support your strategy and identifying opportune moments and market patterns. 

Capturing profit is only part of the plan. A day trading strategy also includes explicit risk management protocols to protect against rash decision-making and hasty judgment calls. 

In short, a strategy shapes all the habits and rituals that form a day trader’s daily activities. 

With that in mind, here are a few of the most popular day trading strategies for beginners. 

1. Momentum trading

Momentum trading is a classic day trading strategy for beginners. Momentum traders look for stocks with the potential to move 20% or more in price and then jump in early while the trend builds momentum. The key, of course, is to offload it before momentum shifts in the other direction. 

The core idea involves identifying assets with strong upward or downward momentum and then entering trades early in order to profit as that momentum potentially builds.  However, the key to success lies in exiting the trade before the momentum reverses direction.

Example: 

A long position on the S&P 500 futures during a strong uptrend identified over the past few weeks aims to capture a portion of that trend within a single trading day.

Key momentum indicators:

• The Momentum indicator
• Relative Strength Index (RSI)
• Moving Averages
• Stochastic oscillators
  

Noteworthy

No single indicator is a foolproof predictor. Instead, use technical indicators in tandem with price action confirmation and potentially other technical analysis tools to get a more comprehensive view.

2. Trend Trading

Trend trading involves identifying assets with a clear upward or downward trend within a given short-term timeframe. The goal is to profit from price movements within a single trading session by capturing a segment of the prevailing trend.

Technical indicators help identify stocks that have demonstrated a strong trend over recent weeks. A more granular analysis can supplement this to locate intraday support and resistance levels, which may provide optimal entry points for day traders.

When the prevailing trend is bullish, a day trader will aim to initiate a buy position at a support level, anticipating a rebound and a subsequent strong upward surge. Conversely, with a bearish trend, the strategy would involve selling at a resistance point, expecting a downturn followed by a significant downward movement.

Key trend indicators:

• Moving Averages
• ADX
• Parabolic SAR

Noteworthy

• Momentum trading is like riding a wave – You want to get on early and jump off before it crashes.
• Trend trading is like riding a train – You want to get on while it’s already moving in the right direction and get off at your desired stop.

3. Range trading

As its name suggests, range trading strategies target stocks that exhibit a consistent price movement within a defined range over a predetermined period.  This range is essentially a “channel” formed by the highs (resistance) and lows (support) the stock has reached within that timeframe.

Day traders who employ this strategy aim to capitalize on these price fluctuations by buying near support levels and selling near resistance levels. The goal is to profit from the repeated back-and-forth price movements (oscillations) within the established range.

When the price approaches the upper resistance level of the range, the day trader might initiate a sell position, anticipating a “correction” or downward movement back toward the support level. Conversely, when the price nears the lower support level, the trader might enter a buy position, expecting a “rebound” or upward movement back toward the resistance.

Key indicators for range-bound markets:

• Average True Range
• Bollinger Bands
• Pivot Points

4. Fading

Fading is a contrarian trading strategy; it’s the opposite of trend trading. Fading involves making trades against a prevailing trend. The goal is to profit from short-term reversals within that trend, also known as pullbacks, in uptrends or from bounces in downtrends.

The idea behind fading is that herd mentality has pushed prices too far in a particular  direction and they will eventually revert to the mean. Using this strategy, the trader identifies stocks that are overbought or oversold, looks for signs of a change in the short-term trend (capitulation), and enters a trade. 

Identifying the right entry points is key. During uptrends, day traders watch for resistance levels. These are price points where upward momentum might stall, creating an opportunity for a pullback. Conversely, in downtrends, the focus shifts to support levels. Here, the market might find temporary buying pressure, leading to a potential bounce.

Key fading indicators:

• Bollinger Bands
• Moving Average Convergence Divergence (MACD)
• RSI
• Money Flow Index (MFI)

5. Scalping

Scalping is a high-frequency trading strategy that capitalizes on minute price variations. The theory is simple to follow, so it’s a favorite with beginning day traders. 

Scalping is also particularly effective in volatile markets. However, it requires a great deal of discipline and concentration. Trade duration is usually just a matter of seconds or possibly minutes, so fast decision-making and reliable technology are critical. 

Key scalping indicators:

• Simple Moving Average (SMA)
• MACD
• Stochastic Oscillator
• Exponential Moving Average (EMA)

6. Trading the news

This strategy anticipates volatility and price movement in response to specific events, like earnings reports, jobs reports, or rate hikes from a central bank. 

The idea is to predict which way prices will move and find assets that haven’t been fully repriced after a market-moving event. The major drawback with trading the news is that it depends on a newsworthy event, so trading opportunities tend to be limited. 

Key news trading indicators:

• Moving averages
• Fibonacci levels
• Pivot Points

Noteworthy

If you only trade at certain times of the day, or only on certain days of the week, news trading may not work for you, as you need to be behind your screens at all times.

Essential tools for day trading

By now, you’ve probably figured out that you’ll need the help of technology to develop and execute your trading strategy. These are the tools you need to get started, so do your research to find the ones that work best for you. 

#1 Trading Platform

The quality of your platform’s price market feed is essential for a day trader. When certain transactions last only a few minutes or even seconds, having truly real-time quotes is not an option but a necessity.

Day traders opt for live stock market feeds, refreshed in push mode (when the trading platform pushes the latest quote without waiting for your computer to request it), and delivered tick by tick rather than in packets.

Their trading screens generally feature several trading windows dedicated to tracking stock charts on several time scales, monitoring economic information, and placing orders.

Example of a trading station set up for day trading with ProRealTime software.

Noteworthy

Day traders rely on charts, such as Japanese candlesticks or bar charts, to visualize price movements and understand the dynamics of the buyer-seller battle. These charts offer crucial insights into price trends and underlying market dynamics.

#2 Charting Tools

To identify key price levels, day traders rely on chart patterns. These are geometric shapes formed on price charts that offer clues about potential entry points, price targets, and where a trade might become invalid. These levels are crucial for setting take-profit and stop-loss orders to manage risk.

Day traders can further enhance their analysis with technical analysis tools. These tools, such as Fibonacci retracements, pivot points, Gann ranges, or Andrews’ Pitchfork, provide additional insights into potential market trends and reversals.

#3 Technical Indicators

To identify and filter the best trading signals, the day trader also relies on several technical indicators, such as trend indicators, oscillators, price envelopes, etc.

Some of these technical indicators, like moving averages, provide information on the current trend, while others, such as Bollinger bands, provide information on market volatility.

Noteworthy

Chart patterns and technical indicators are both valuable tools for day traders, but they serve different purposes. Chart patterns, like head and shoulders or triangles, are visual formations on price charts that suggest potential future price movements based on historical trends. Technical indicators, on the other hand, are mathematical calculations derived from price, volume, and other data to identify trends, momentum, and support/resistance levels.

#4 Market Screeners

Stock screeners help you find the specific types of stocks you need to execute your trading plan. You tell it what you’re looking for, and it produces all the stocks that fit your requirements. From there, you narrow down your options and build your daily watch list. 

Look for a screener that’s highly customizable with robust technical analysis capabilities. The most powerful trading platforms have built-in stock screeners, but you may want to upgrade or complement your existing screener with a freestanding stock screener. 

#5 The Economic Calendar

The economic calendar provides day traders with a clear overview of all key economic dates and announcements for the trading session, presented in a table format. 

This tool helps them anticipate and navigate the volatility spikes triggered by these releases and even develop specific trading plans tailored to news-based strategies.

Typically, this economic calendar is enhanced with a real-time news feed, allowing traders to monitor the latest developments—including spontaneous statements from policymakers, unexpected economic updates, and natural disasters—ensuring they remain well-informed and prepared.

#6 Trading Journal

Day traders often keep a trading journal to speed up the learning process and maintain control over their emotions.

Available in either digital or paper form, a trading journal allows traders to reflect on their thoughts, actions, and performance, thereby enhancing their decision-making process. Amidst the volatility of the financial markets, your trading journal will provide a solid foundation for continuous improvement.

#7 The Backtesting 

To verify the accuracy of their trading signals and improve their risk management strategies, day traders utilize backtesting tools. These tools allow traders to evaluate the effectiveness of their strategies using historical price data.

Example of a backtesting interface from ProRealTime software.

Although past results do not guarantee future outcomes, thorough backtesting helps traders better understand how their strategies perform under various market conditions, such as during stock market crashes, speculative bubbles, or significant price gaps.

Based on the outcomes of these tests, a day trader may decide to adjust the settings of their market screener, tweak the parameters of their technical indicators, or reposition their stop-loss and take-profit orders.

How to Manage Day Trading Risk

Successful day traders are surprisingly risk-averse. They develop safeguards to mitigate risk in every trade they take. 

Here are a few common money management rules used by day traders:

The 1% rule doesn’t mean that you can only invest 1% on a single trade. It means that you should never lose more than 1% on a single trade. In other words, if you have $10,000 in your trading account, your risk strategy should limit your loss to $100 on any single trade. 

Other risk-management rules to keep in mind:

1. Always stick to your plan. Don’t try something new on a whim or follow a hunch in the heat of the moment. 

2. Know when and how you will enter and exit a trade. That means setting ironclad limits on profit and loss for every trade. Avoid the temptation to get greedy when things are going your way—or lose your cool when they aren’t. When in doubt, see rule #1.

3. Don’t forget to factor in costs like spreads and commissions. They can eat into your profits faster than you think. If you’ve done the work, your plan should account for them. So when in doubt, see rule #1. 

4. Always use stop-loss and take-profit orders. They’re built-in guardrails for your risk management plan.

5. Don’t go crazy buying on margin, and keep careful tabs on your margin account. No one wants a margin call, and if you’re faced with one, you might be forced to sell assets, regardless of price, to meet it. Of course, if you’re following rule #1 diligently, this won’t be a problem. 

6. Never leave open positions unattended. Automated trading systems are all the rage, but they can never replace your carefully executed trading strategy. Remember, even the “safest” technology isn’t foolproof.

7. Keep your emotions in check when you trade. If you’re using stop-loss and take-profit orders, you’ll be better protected from emotional decision-making. Your safest bet, however, is to always follow rule #1.

Conclusion

It’s extremely hard to become a successful day trader. If it weren’t, everyone would be making millions in the market. The sad truth is that most people jump in and lose their shirts because they weren’t prepared to succeed. 

Hopefully, this guide gives you enough information to test the market with your eyes wide open. 

And when you’re ready to get started, ProRealTime offers one of the most robust and easy-to-use demo accounts around. You can open an account for free and use its powerful screening and charting tools to start building and testing your own day trading strategy.