How to Become a Successful Day Trader
- Know the rules and regulations
- Understand the principle of risk versus reward
- In generally, have a risk-reward ratio of at least 1-2
Understanding Risk and Reward
If you want to be a successful day trader, you’ll need to understand the rules, and factors that go into decision making. For starters, you’ll need to maintain an account of a minimum $25K at all times, as per SEC and FINRA regulations. There are many types of stocks you can trade, such as biotech stocks, and penny stocks, but whether you buy stocks online or not, the same basic principle applies to all of them – the principle of risk vs. reward.
Traders have different styles, but nearly all successful ones understand the principle of risk versus reward. The basic idea is that you shouldn’t risk more than your potential reward.
An Example of How to Become A Successful Day Trader
“Never risk more than you can make” is a good rule of thumb when it comes to day trading – as well as gambling. Just like successful blackjack players who count cards and wait until the deck is “hot” enough to bet, your goal as a day trader is to minimize risk and maximize reward.
Generally speaking, you don’t want to risk $1 to make $1. A risk-reward ratio of 1-1 means that you need at least a 51% chance of winning, and even then commissions and fees would decrease the reward. Instead, you want to risk $1 to make at least $2. That way, you only need to be right 60% of the time to make a profit. Consider this scenario: You have 100 trades and are right 60% of the time. You take profits when you’re up $1,000 and cut your losses at $500. Then, you could still be up 40K ($1,000 x 0.60 – $500 x 0.40).
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The Bottom Line
Understanding risk vs. reward is possibly the most important concept a day trader can know. Having a risk-reward ratio of at least 1:2 can help you turn a profit and minimize losses. At the end of the day, you have to take risks to be a successful day trader, so understand how much you must take.
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