The biggest fear of any day trader in the first year is losing all their money. No fear comes close. Fortunately, there are a lot of variables and points that day traders can deploy to protect their efforts. The below is a quick guide to controlling the two biggest aspects of day trading- managing money and managing risk.
The Money Reserves
One day trader has $100,000 total to work with for their savings. They empty it out and they go full steam ahead. Yet, they have made a grave error. These investors are working with everything they have. If they lose all their money, which can happen, they live on the street. The reserve is an account that is untapped for investing. it could be placed in a 401(K) or some safety checking account. It is not actively invested in day trading.
Investors have to have some breathing room. If a day trader has $100,000 to their name, they only have about $25,000 to use for investing. This is a necessary protective buffer and one widely misused. The number can vary tremendously, but the main idea is to have a separate account for investing and a separate account for living expenses.
Day traders have to be experts at managing risk. Every action has to be justified by the risk. There may be a 1 in 100 chance of this investment failing. Unfortunately, if day traders continue long enough, they will hit the 1 in 100 at some point. It will happen. Are they protected against a big fall back? Do they have the risk assessed in their numbers? Eventually, the 100-sided decide will land “skull up.”
The above only scratches the tiniest surface of how to manage year one activities in day trading. It is an adventure that can be fruitful. Yet, any day trader has gone through huge ups and downs and through catastrophic mistakes to get where they are. It is unavoidable, but it can be minimized. Follow Markus Heitkoetter on Twitter for more information on managing activities through the day-to-day grind of day trading. See more here to gain insight into this tough area.